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 Michael E. Reed on January 3, 2006 (each an “Employment Agreement”). Messrs. Champion’s and Cope’s Employment Agreements are each effective as of June 6, 2005; and Mr. Reed’s Employment Agreement is effective as of January 30, 2006 (each, the respective “Effective Date”). Except for the exceptions noted herein, each Employment Agreement is identical as to all terms and conditions relating to employment, including an initial three-year employment term, with an automatic one-year renewal unless either we or the executive gives notice within ninety days prior to the end of the term. Mr. Reed has the title of Chief Executive Officer and receives a base salary of $500,000 per annum. Each of Mr. Champion and Mr. Cope has the title of Co-President and Co-Chief Operating Officer and receives a base salary of $200,000 per annum. Each executive is eligible to receive an annual target bonus of $200,000 upon the achievement of certain performance goals as agreed to by the executive and our board of directors. Such bonus may be payable in our common stock or cash as determined by our board of directors. In the case of Mr. Reed, in no event will the portion of such bonus paid in our common stock be greater than 50% of the annual target bonus without Mr. Reed’s approval. In the case of each of Mr. Champion and Mr. Cope, the respective executive has the right to receive the lesser of: (x) 50% or (y) $100,000 of such bonus payable in cash. Any bonus that is payable in common stock (a “Restricted Stock Bonus”) will vest ratably on the third, fourth and fifth anniversaries from the date of grant. For fiscal year 2006 only, Mr. Reed shall receive total current compensation (which includes base salary, annual target bonus and dividends on the Initial Stock Grants (described below)) of no less than $700,000. The bonus, payable in either cash or stock, will be paid no later than two and one-half months following completion of our fiscal year. The executive must be employed on the last day of the fiscal year to receive a bonus. Mr. Reed also received a “sign-on” cash bonus of $1.5 million and reimbursement of reasonable relocation expenses.

In entering into the Employment Agreement, Mr. Reed, Mr. Champion and Mr. Cope each agreed to purchase 250 shares, 500 shares and 300 shares, respectively, of common stock. Each Employment Agreement also provides that Mr. Reed, Mr. Champion and Mr. Cope will receive a one-time grant of 3,000 shares, 1,500 shares and 900 shares, respectively, of common stock (the “Initial Stock Grants”), which vests ratably on the third, fourth and fifth anniversaries from the respective Effective Dates.

Each executive will be entitled to all of the usual benefits offered to employees at the executive’s level, including vacation, sick time, participation in our retirement plan (if any) and medical, dental and insurance programs, all in accordance with the terms of such plans and programs in effect from time to time.

If the executive’s employment is terminated without Cause (as such term is defined in the Employment Agreement), the executive shall immediately vest as the owner of the percentage of the shares that are subject to the Initial Stock Grant and any additional Restricted Stock Bonuses that would have vested on the anniversary of the Effective Date following the date of such termination; provided, however, that in no event shall the number of shares subject to such vesting be less than

 

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one-third each of the shares subject to the Initial Stock Grant and any additional Restricted Stock Bonuses. Further, in the event of a “change of control” (as defined in the applicable stockholder agreement, as discussed below) and the executive’s employment is terminated by us (or our successor) without Cause within twelve months of such change of control, 100% of the then remaining unvested shares subject to the Initial Stock Grant and any additional Restricted Stock Bonuses shall immediately vest. If Mr. Reed is terminated for Cause, he shall forfeit all unvested shares subject to the Initial Stock Grant and Restricted Stock Bonuses and, in the case of a termination due to an act of dishonesty committed by Mr. Reed in connection with our business, he shall forfeit all shares subject to the Initial Stock Grant and Restricted Stock Bonuses. If either Mr. Champion or Mr. Cope is terminated for Cause, under any circumstance, he shall forfeit all shares subject to the Initial Stock Grant and Restricted Stock Bonuses.

In addition to the foregoing, if the executive is terminated without Cause, including within twelve months of a change of control, the executive will receive severance payments and benefits upon the signing of a release of claims. The severance payments and benefits are composed of continuation of annual base salary and bonuses for twelve months following the date of termination of employment and continuation of medical benefits, at the same level as provided prior to termination, for twelve months or until the executive becomes eligible for the medical benefits program of a new employer.

We entered into an employment agreement with Mark R. Thompson on April 19, 2006, effective as of May 10, 2006, and with Polly G. Sack on May 1, 2006, effective as of May 17, 2006. Except for the exceptions noted herein, each of Mr. Thompson’s and Ms. Sack’s employment agreement is identical to the above-described Employment Agreements as to all terms and conditions relating to employment. Mr. Thompson has the title of Chief Financial Officer and receives a base salary of $250,000 per annum. Ms. Sack has the title of General Counsel and receives a base salary of $225,000 per annum. Each employment agreement has no guaranteed term of employment or renewal provisions. Mr. Thompson and Ms. Sack are eligible to receive an annual bonus, without a targeted level, upon the achievement of certain goals as agreed to by Mr. Thompson and Ms. Sack, respectively, and the Board of Directors. Such bonus may be payable in our common stock or cash as determined by the Board, without restriction as to the proportions of our common stock or cash comprising such bonus. For fiscal year 2006 only, Mr. Thompson and Ms. Sack will receive a bonus of no less than $125,000 and $85,000 in cash, respectively. Each of Mr. Thompson’s and Ms. Sack’s employment agreement also provides for an Initial Stock Grant of 150 shares of common stock on the terms and conditions discussed above with respect to the Initial Stock Grant to Mr. Reed. Each of Mr. Thompson and Ms. Sack will also receive reimbursement of reasonable relocation expenses.

Separation and Consulting Agreement

On May 6, 2005, we entered into a separation and consulting agreement (the “Separation Agreement”) with Kenneth L. Serota. We and Mr. Serota had been parties to an employment agreement dated February 11, 2003 (the “Prior Agreement”), pursuant to which Mr. Serota served as our President, Chief Executive Officer and Chairman. In connection with our acquisition by Fortress, Mr. Serota resigned his employment with us, as well as any directorships, committee memberships and any other positions with us and our subsidiaries. Under the Separation Agreement, Mr. Serota received the following transaction and termination payments and benefits: (a) $1,000,000 payable in a single lump-sum cash payment as consideration for Mr. Serota’s efforts in connection with our acquisition by Fortress; (b) a $500,000 termination bonus payable in a single lump-sum cash payment; (c) loan forgiveness by us for loans made to Mr. Serota in the principal amount of $597,610, along with the forgiveness of any accrued but unpaid interest that may be due with respect to such loans; (d) reimbursement to Mr. Serota of any legal fees or expenses incurred by Mr. Serota in connection with the Separation Agreement; and (e) continuation of coverage under our medical plan for eighteen months after separation at our expense.

 

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On June 6, 2005, Mr. Serota was appointed to serve as a consultant to us for a 12 month term. In consideration for such services, Mr. Serota received $500,000 to be paid in 12 equal installments over the term. The amounts paid to Mr. Serota under the Separation Agreement were in full satisfaction with respect to all of our obligations and liabilities to Mr. Serota pertaining to his employment with us.

Compensation Plans

Deferred Compensation Plans

We maintain three non-qualified deferred compensation plans, as described below, for certain of our employees.

We maintain the Liberty Group Publishing, Inc. Publishers’ Deferred Compensation Plan, a non-qualified deferred compensation plan for the benefit of certain designated publishers of our newspapers. Under the publishers’ plan, we credit an amount to a bookkeeping account established for each participating publisher pursuant to a pre-determined formula that is based upon the gross operating profits of each such publisher’s newspaper. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. The amounts credited to the bookkeeping account on behalf of each participating publisher vest on an installment basis over a period of 15 years. A participating publisher forfeits all amounts under the publishers’ plan in the event that the publisher’s employment with us is terminated for “cause” as defined in the publishers’ plan. Amounts credited to a participating publisher’s bookkeeping account are distributable upon termination of the publisher’s employment with us and will be made in a lump sum or installments as elected by the publisher. We recorded $159,000, $193,000, $70,000 and $98,000 of compensation expense related to the publishers’ plan in 2003, 2004, January 1, 2005 through June 5, 2005 and June 6, 2005 through December 31, 2005, respectively.

We maintain the Liberty Group Publishing, Inc. Executive Benefit Plan, a non-qualified deferred compensation plan for the benefit of certain of our key employees. Under the executive benefit plan, we credit an amount, determined in our sole discretion, to a bookkeeping account established for each participating key employee. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. The amounts credited to the bookkeeping account on behalf of each participating key employee vest on an installment basis over a period of 5 years. A participating key employee forfeits all amounts under the executive benefit plan in the event that the key employee’s employment with us is terminated for “cause” as defined in the executive benefit plan. Amounts credited to a participating key employee’s bookkeeping account are distributable upon termination of the key employee’s employment with us and will be made in a lump sum or installments as elected by the key employee. We recorded $77,000, $61,000, $21,000 and $29,000 of compensation expense related to the executive benefit plan in 2003, 2004, January 1, 2005 through June 5, 2005 and June 6, 2005 through December 31, 2005, respectively.

We maintain the Liberty Group Publishing, Inc. Executive Deferral Plan, a non-qualified deferred compensation plan for the benefit of certain of our key employees. Under the executive deferral plan, eligible key employees may elect to defer a portion of their compensation for payment at a later date. Currently, the executive deferral plan allows a participating key employee to defer up to 100% of his or her annual compensation until termination of employment or such earlier period as elected by the participating key employee. Amounts deferred are credited to a bookkeeping account established by us for this purpose. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. Amounts deferred under the executive deferral plan are fully vested and nonforfeitable. The amounts in the bookkeeping account are payable to the key employee at the time and in the manner elected by the key employee.

 

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Omnibus Stock Incentive Plan

Prior to this offering, we intend to adopt a new equity incentive plan for our employees, the GateHouse Media, Inc. Omnibus Stock Incentive Plan (the “Plan”) and to present the Plan to our stockholders for their approval. The purposes of the Plan will be to strengthen the commitment of our employees, motivate them to faithfully and diligently perform their responsibilities and attract and retain competent and dedicated persons who are essential to the success of our business and whose efforts will result in our long-term growth and profitability. To accomplish such purposes, the Plan will provide for the issuance of stock options, stock appreciation rights, restricted shares, deferred shares, performance shares, unrestricted shares and other stock-based awards. We expect that the Plan, as adopted, will generally be in conformance with the following description.

A total of              shares of our common stock will be reserved for issuance under the Plan, provided however, that commencing on the first day of our fiscal year beginning in calendar year 2007, the number of shares reserved and available for issuance will be increased by an amount equal to             . All such shares of our common stock that are available for the grant of awards under the Plan may be granted as incentive stock options. When section 162(m) of the Internal Revenue Code (the “Code”) becomes applicable, the maximum aggregate number of shares that will be subject to stock options or stock appreciation rights that may be granted to any individual during any fiscal year will be              and the maximum aggregate number of shares that will be subject to awards of restricted stock, deferred shares, unrestricted shares or other stock-based awards that may be granted to any individual during any fiscal year will be                 .

The Plan will initially be administered by our board of directors, although it may be administered by either our board of directors or any committee of our board of directors including a committee that complies with the applicable requirements of section 162(m) of the Code, Section 16 of the Exchange Act and any other applicable legal or stock exchange listing requirements (the board or committee being sometimes referred to as the “plan administrator”). The plan administrator may interpret the Plan and may prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of the Plan. The Plan permits the plan administrator to select the directors, key employees and consultants who will receive awards, to determine the terms and conditions of those awards, including but not limited to the exercise price, the number of shares subject to awards, the term of the awards and the vesting schedule applicable to awards and to amend the terms and conditions of outstanding awards, including but not limited to reducing the exercise price of such awards, extending the exercise period of such awards and accelerating the vesting schedule of such awards.

We may issue incentive stock options or non-qualified stock options under the Plan. The incentive stock options granted under the Plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code and may only be granted to our employees or any employee of our parent or any subsidiary of ours. The option exercise price of all stock options granted under the Plan will be determined by the plan administrator, except that any incentive stock option or any stock option intended to qualify as performance-based compensation under section 162(m) of the Code will not be granted at a price that is less than 100% of the fair market value of the stock on the date of grant. Further, the exercise price of incentive stock options granted to stockholders who own greater than 10% of the voting stock will not be granted at a price less than 110% of the fair market value of the stock on the date of grant. The term of all stock options granted under the Plan will be determined by the plan administrator, but may not exceed 10 years (five years for incentive stock options granted to stockholders who own greater than 10% of the voting stock). No incentive stock option may be granted to an optionee, which, when combined with all other incentive stock options becoming exercisable in any calendar year that are held by that optionee, would have an aggregate fair market value in excess of $100,000. In the event an optionee is awarded $100,000 in incentive stock options in any calendar year, any incentive stock options in excess of $100,000 granted during the same year

 

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will be treated as nonqualified stock options. Each stock option will be exercisable at such time and pursuant to such terms and conditions as determined by the plan administrator in the applicable stock option agreement.

Unless the applicable stock option agreement provides otherwise, in the event of an optionee’s termination of employment or service for any reason other than cause, retirement, disability or death, such optionee’s stock options (to the extent exercisable at the time of such termination) generally will remain exercisable until 90 days after such termination and will expire thereafter. Unless the applicable stock option agreement provides otherwise, in the event of an optionee’s termination of employment or service due to retirement, disability or death, such optionee’s stock options (to the extent exercisable at the time of such termination) generally will remain exercisable until one year after such termination and will expire thereafter. Stock options that were not exercisable on the date of termination will expire at the close of business on the date of such termination. In the event of an optionee’s termination of employment or service for cause, such optionee’s outstanding stock options will expire at the commencement of business on the date of such termination.

In the event of a change in control (as defined below), unless each outstanding stock option is assumed, continued or substituted pursuant to the change in control transaction’s governing document, such stock options will be come fully vested and exercisable immediately prior to the effective date of such change in control and will expire upon the effective date of such change in control. Unless otherwise determined by the plan administrator and evidenced in an award agreement, if a change in control transaction occurs that is a qualifying asset sale or that includes a continuation, assumption or substitution of stock options and an optionee’s employment with us or any acquiring entity or affiliate of ours is terminated by the employer other than for cause on or after the effective date of the change in control but prior to the first anniversary of the effective date of the change in control, then 50% of the optionee’s outstanding and unvested options will become fully vested and exercisable on the date of such termination. The term “change in control” generally means (1) any person or entity (other than (a) an affiliate of Fortress or any managing director, general partner, director, limited partner, officer or an employee of any such affiliate of Fortress or (b) any investment fund or other entity managed directly or indirectly by Fortress or any general partner, limited partner, managing member or person occupying a similar role of or with respect to any such fund or entity) becomes the beneficial owner of our securities representing 50% of our then outstanding voting power; (2) the consummation of a merger of the Company or any subsidiary of ours with any other corporation, other than a merger immediately following which our board of directors immediately prior to the merger constitutes at least a majority of our board of directors surviving the merger or, if the surviving company is a subsidiary, the ultimate parent thereof; or (3) our stockholders approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale of all or substantially all of our assets, other than (a) a sale of such assets to an entity, 50.1% or more of the voting power of which is held by our stockholders following the transaction in substantially the same proportions as their ownership of the Company immediately prior to the transaction or (b) a sale of such assets immediately following which our board of directors immediately prior to such sale constitutes at least a majority of the board of directors of the entity to which the assets are sold, or, if that entity is a subsidiary, the ultimate parent thereof. Notwithstanding the foregoing, a change in control will not be deemed to occur by reason of our initial public offering.

Stock appreciation rights (“SARs”) may be granted under the Plan either alone or in conjunction with all or part of any stock option granted under the Plan. A stand-alone SAR granted under the Plan entitles its holder to receive, at the time of exercise, an amount per share equal to the excess of the fair market value (at the date of exercise) of a share of common stock over a specified price fixed by the plan administrator. An SAR granted in conjunction with all or part of a stock option under the Plan entitles its holder to receive, at the time of exercise, an amount per share equal to the excess of the fair market value (at the date of exercise) of a share of common stock over the exercise price of the related stock

 

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option. In the event of a participant’s termination of employment or service, stand-alone SARs will be exercisable at such times and subject to such terms and conditions determined by the plan administrator on or after the date of grant, while SARs granted in conjunction with all or part of a stock option will be exercisable at such times and subject to terms and conditions as set forth for the related stock option. SARs will be designed to comply with section 409A of the Code.

Restricted shares, deferred shares and performance shares may be granted under the Plan. The plan administrator will determine the purchase price, performance period and performance goals, if any, with respect to the grant of restricted shares, deferred shares and performance shares. Participants with restricted shares and shares of preferred stock generally have all of the rights of a stockholder. With respect to deferred shares, during the restricted period, subject to the terms and conditions imposed by the plan administrator, the deferred shares may be credited with dividend- equivalent rights. If the performance goals and other restrictions are not attained, the participant will forfeit his or her restricted shares, deferred shares and/or performance shares. Subject to the provisions of the Plan and applicable award agreement, the plan administrator has sole discretion to provide for the lapse of restrictions, installments or the acceleration or waiver of restrictions (in whole or part) under certain circumstances, including, but not limited to, the attainment of certain performance goals, a participant’s termination of employment or service, a participant’s death or disability or the occurrence of a change in control as defined in the applicable award agreement.

            ,              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 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.

Except as otherwise provided by the plan administrator, on the first business day after our annual meeting of stockholders and each such annual meeting thereafter during the term of the Plan, each of our independent directors who is serving following such annual meeting will automatically be granted under the 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.

In the event of a merger, consolidation, reorganization, recapitalization, stock dividend or other change in corporate structure affecting the number of issued shares of common stock, the plan administrator will be required to make a proportionate adjustment in (1) the aggregate number of shares reserved for issuance under the Plan, (2) the maximum number of shares that may be granted to any participant in any calendar year, (3) the kind, number and exercise price subject to outstanding stock options and SARs granted under the Plan and (4) the kind, number and purchased price of shares subject to outstanding awards of restricted shares, deferred shares and performance shares granted or other stock-based awards under the Plan, provided that no such adjustment will cause any award under the Plan that is or becomes subject to section 409A of the Code to fail to comply with the requirements of that section. In addition, the plan administrator, in its discretion, may terminate all awards with the payment of cash or in-kind consideration.

The terms of the Plan provide that the board of directors may amend, alter or discontinue the Plan, but no such action may impair the rights of any participant with respect to outstanding awards without the participant’s consent. The plan administrator, however, reserves the right to amend, modify

 

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or supplement an award to either bring it into compliance with section 409A of the Code, or to cause the award to not be subject to such section. Unless the board of directors determines otherwise, stockholder approval of any such action will be obtained if required to comply with applicable law. The Plan will terminate on                     , 2016.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Management Stockholder Agreements

At the closing of our acquisition by Fortress, we entered into stockholder agreements with Fortress and certain members of management, including Scott T. Champion, Randall W. Cope, Daniel D. Lewis, Gene A. Hall, Kelly M. Luvison and Gerry Smith, who purchased quantities of our common stock and were awarded restricted stock, in some cases, in satisfaction of our obligations to them under certain employment agreements. Each of Michael E. Reed, Mark R. Thompson and Polly G. Sack also entered into a stockholder agreement upon commencing employment with us.

Under the stockholder agreements, we sold to certain of such management investors quantities of our common stock at a purchase price of $1,000 per share. We also granted to all such management investors a number of restricted shares of common stock, which restricted shares are subject to certain vesting provisions, including acceleration of vesting upon a change in control (which will not be triggered by this offering). Subject to specified limitations, these stockholder agreements provide for a number of rights and obligations, including tag-along sale rights and drag-along sale obligations. Upon the consummation of this offering, the tag-along sale rights and drag-along sale obligations will terminate (assuming the net proceeds to us from the offering are not less than $50,000,000).

The stockholder agreements also contain a call option exercisable by us upon termination of the management investor’s employment or cessation of services as director with us or our subsidiaries for any reason. The stockholder agreements also contain non-competition provisions that, among other things, prohibit such management investor from competing, directly or indirectly, with our business activities in the United States during employment with us and for a period of one year from the termination date of employment for any reason other than termination by us without cause. The stockholder agreements also contain provisions prohibiting management investors from soliciting our employees and clients for certain periods.

Registration Rights Agreement

Demand Rights.    We have granted to Fortress, for so long as Fortress beneficially owns an amount of our common stock at least equal to 5% or more of our common stock issued and outstanding immediately after the consummation of this offering (a “Registrable Amount”), “demand” registration rights that allow Fortress at any time after six months following the consummation of this offering to request that we register under the Securities Act, an amount equal to or greater than 5% of our stock that Fortress owns. Fortress is entitled to an aggregate of four demand registrations. We are not required to maintain the effectiveness of the registration statement for more than 60 days. We are also not required to effect any demand registration within six months of a “firm commitment” underwritten offering to which the requestor held “piggyback” rights and which included at least 50% of the securities requested by the requestor to be included. We are not obligated to grant a request for a demand registration within four months of any other demand registration and may refuse a request for demand registration if, in our reasonable judgment, it is not feasible for us to proceed with the registration because of the unavailability of audited financial statements.

Piggyback Rights.    For so long as Fortress beneficially owns an amount of our common stock at least equal to 1% of our common stock issued and outstanding immediately after the consummation of this offering, Fortress also has “piggyback” registration rights that allow Fortress to include the shares of common stock that Fortress owns in any public offering of equity securities initiated by us (other than those public offerings pursuant to registration statements on Forms S-4 or S-8) or by any of our other stockholders that may have registration rights in the future. The “piggyback” registration rights of Fortress are subject to proportional cutbacks based on the manner of the offering and the identity of the party initiating such offering.

 

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Shelf Registration.    We have granted Fortress, for so long as Fortress beneficially owns a Registrable Amount, the right to request shelf registrations on Form S-3, providing for an offering to be made on a continuous basis, subject to a time limit on our efforts to keep the shelf registration statement continuously effective and our right to suspend the use of the shelf registration prospectus for a reasonable period of time (not exceeding 60 days in succession or 90 days in the aggregate in any 12-month period) if we determine that certain disclosures required by the shelf registration statement would be detrimental to us or our stockholders.

Indemnification; Expenses.    We have agreed to indemnify Fortress against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which Fortress sells shares of our common stock, unless such liability arose from Fortress’ misstatement or omission, and Fortress has agreed to indemnify us against all losses caused by its misstatements or omissions. We will pay all expenses incident to registration and Fortress will pay its respective portions of all underwriting discounts, commissions and transfer taxes relating to the sale of its shares under such a registration statement.

2006 Credit Facility

On June 6, 2006, our subsidiaries Holdco, Operating and certain of their subsidiaries entered into our 2006 Credit Facility. For additional information on our 2006 Credit Facility, see “Description of Certain Indebtedness.” Two affiliates of Fortress currently hold first lien term loans under our 2006 Credit Facility, which were purchased in the secondary market in arms’-length transactions.

In connection with the second lien term loan under the 2006 Credit Facility, we entered into an agreement with FIF III Liberty Holdings LLC, which owned approximately 96% of our common stock as of June 30, 2006, whereby FIF III Liberty Holdings LLC agreed to purchase from us on demand shares of our common stock for a cash amount equal to the amount outstanding under our second lien term loan if an “Event of Default” (as defined in the second lien term loan) occurs. FIF III Liberty Holdings LLC’s commitment to purchase shares of common stock will terminate when the second lien term loan is repaid. We intend to repay that facility concurrently with the consummation of this offering. See “Use of Proceeds.”

Other Investment Activities of our Principal Shareholder

The Fortress shareholders and their affiliates engage in a broad spectrum of activities, including investment advisory activities, and have extensive investment activities that are independent from and may from time to time conflict with ours. Fortress and certain of its affiliates are, or sponsor, advise or act as investment manager to, investment funds, portfolio companies of private equity investment funds and other persons or entities that have investment objectives that may overlap with ours and that may, therefore, compete with us for investment opportunities.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Prior to this offering, all of our ownership interests were beneficially owned by Fortress and certain members of our management. The following table provides summary information regarding the beneficial ownership of shares of our common stock as of June 30, 2006, as adjusted to give effect to the sale of our common stock in this offering, by:

 

  Ÿ   each person or group known to us to beneficially own more than 5% of our common stock;

 

  Ÿ   each of our directors;

 

  Ÿ   Michael E. Reed, our Chief Executive Officer and each of our named executive officers; and

 

  Ÿ   all of our directors and executive officers as a group.

Beneficial ownership of shares is determined under the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. The percentage of beneficial ownership of our common stock before this offering is based on 230,090 issued shares of our common stock outstanding as of June 30, 2006. The percentage of beneficial ownership of our common stock after this offering is based on shares of our common stock outstanding. The table assumes that the underwriters will not exercise their over allotment option to purchase up to              shares of our common stock.

Except as indicated by footnote and subject to applicable community property laws, each person identified in the table possesses sole voting and investment power with respect to all shares of common stock held by them.

 

Name and Address of Beneficial Owner

   Number of Shares
Beneficially Owned(2)
   Percentage of Shares
Beneficially Owned
      Prior to Offering     After Offering

Executive Officers and Directors(1)

       

Michael E. Reed

   3,250    1.4 %  

Scott T. Champion

   2,100    *    

Randall W. Cope

   1,300    *    

Gene A. Hall

   2,000    *    

Kelly M. Luvison

   180    *    

William B. Doniger

   —      —      

Wesley R. Edens(3)

   220,500    95.8 %  

Randal A. Nardone(3)

   220,500    95.8 %  

All directors and executive officers as a group (10 persons)

   229,630    100 %  

5% Stockholders

       

Fortress Investment Holdings LLC(3)(4)

   220,500    95.8 %  

 * Less than one percent
(1) The address of each officer or director listed in the table above is: c/o GateHouse Media, Inc., 350 Willowbrook Office Park, Fairport, New York 14450.
(2) Consists of shares held, including shares of restricted stock subject to vesting.
(3)

Includes 220,500 shares held by FIF III Liberty Holdings LLC. The members of FIF III Liberty Holdings LLC are Fortress Investment Fund III LP, Fortress Investment Fund III (Fund B) LP, Fortress Investment Fund III (Fund C) LP, Fortress Investment Fund III (Fund D) LP, Fortress Investment Fund III (Fund E) L.P., Fortress Investment Fund III (Coinvstment Fund A) LP, Fortress Investment Fund III (Coinvestment Fund B) LP, Fortress Investment Fund III (Coinvestment Fund C) LP and Fortress Investment Fund III (Coinvestment Fund D) LP, collectively, the Fortress III Funds. Fortress Fund III GP LLC is the general partner of the Fortress

 

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III Funds and its sole member is Fortress Investment Fund GP (Holdings) LLC. The sole member of Fortress Investment Fund GP (Holdings) LLC is Fortress Principal Investment Holdings II LLC (“FPIH II”). Pursuant to a management agreement, Fortress Investment Group LLC (“FIG”) is the sole manager of the Fortress III Funds. FIG is 100% owned by Fortress Investment Holdings LLC (“FIH”). FIH and FPIH II are each owned by certain individuals, including Wesley R. Edens, the Chairman of our board, and Randal A. Nardone, one of our directors. By virtue of their ownership interests in FIH and FPIH II, Messrs. Edens and Nardone may be deemed to beneficially own the shares listed as beneficially owned by FIH. Messrs. Edens and Nardone each disclaim beneficial ownership of such shares.

(4) The address of Fortress Investment Holdings LLC is 1345 Avenue of the Americas, 46th Floor, New York, New York 10105.

 

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DESCRIPTION OF CERTAIN INDEBTEDNESS

The following summaries of the material terms of our credit facilities are not complete and are qualified in their entirety by, our First Lien Credit Agreement and our Secured Bridge Credit Agreement, which are included as exhibits to the registration statement of which this prospectus forms a part. Reference is made to those documents for a detailed description of the provisions summarized below.

First Lien Credit Agreement

Holdco, 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 Consolidated Indebtedness to Consolidated EBITDA 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

 

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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 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.

 

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DESCRIPTION OF CAPITAL STOCK

The following summary of the material terms and provisions of our capital stock is not complete and is subject to, and qualified in its entirety by, our amended and restated certificate of incorporation and by-laws which will be included as exhibits to the registration statement of which this prospectus forms a part and by the provisions of applicable Delaware law. Reference is made to those documents and to Delaware law for a detailed description of the provisions summarized below.

General

Upon completion of the offering, our authorized capital stock will consist of                  shares of common stock, par value $0.01 per share, and              shares of preferred stock, par value $0.01 per share. As of June 30, 2006, there were 230,090 shares of common stock outstanding and held of record by 10 stockholders and no shares of preferred stock outstanding. Upon the completion of the offering, we will have                      shares of common stock outstanding and no shares of preferred stock outstanding.

Common Stock

Each holder of common stock is entitled to one vote for each share held on all matters submitted to a vote of the stockholders. The holders of common stock do not have cumulative voting rights in the election of directors. Accordingly, the holders of a majority of the outstanding shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. The holders of common stock are entitled to receive ratably such dividends as may be declared by our board of directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of us, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference, if any, of any then outstanding preferred stock. Holders of our common stock are not entitled to preemptive rights and have no subscription, redemption or conversion privileges. All outstanding shares of common stock are, and all shares of common stock issued by us in the offering will be, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which our board of directors may designate and that we issue in the future.

Preferred Stock

Our board of directors is authorized to issue shares of preferred stock in one or more series, with such designations, preferences and relative participating, optional or other special rights, qualifications, limitations or restrictions as determined by our board of directors, without any further vote or action by our stockholders. We believe that the board of directors’ authority to set the terms of, and our ability to issue, preferred stock will provide flexibility in connection with possible financing transactions in the future. The issuance of preferred stock, however, could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon a liquidation, dissolution or winding up of us.

Anti-takeover Effects of Delaware Law, Our Amended and Restated Certificate of Incorporation and Our Amended and Restated By-Laws

Authorized but Unissued Shares.    The authorized but unissued shares of our common stock and our preferred stock will be available for future issuance without any further vote or action by our stockholders. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans.

 

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The existence of authorized but unissued shares of our common stock and our preferred stock could render more difficult or discourage an attempt to obtain control over us by means of a proxy contest, tender offer, merger or otherwise.

Stockholder Action; Advance Notification of Stockholder Nominations and Proposals.    Our amended and restated certificate of incorporation and by-laws require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by a consent in writing (with the exception of Fortress, so long as Fortress beneficially owns at least 50.1% of our issued and outstanding common stock). Our amended and restated certificate of incorporation also requires that special meetings of stockholders be called only by our board of directors, our chairman or our president (with the exception of Fortress, so long as Fortress beneficially owns at least 50.1% of our issued and outstanding common stock). In addition, our by-laws will provide that candidates for director may be nominated and other business brought before an annual meeting only by the board of directors or by a stockholder who gives written notice to us no later than 90 days prior to nor earlier than 120 days prior to the first anniversary of the last annual meeting of stockholders. These provisions may have the effect of deterring hostile takeovers or delaying changes in control of our management, which could depress the market price of our common stock.

Number, Election and Removal of the Board of Directors.    Upon the closing of the offering, our board of directors will consist of              directors. 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 shall consist of one-third of the directors. 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 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. Between stockholder meetings, directors may be removed by our stockholders only for cause and the board of directors may appoint new directors to fill vacancies or newly created directorships. These provisions may deter a stockholder from removing incumbent directors and from simultaneously gaining control of the board of directors by filling the resulting vacancies with its own nominees. Consequently, the existence of these provisions may have the effect of deterring hostile takeovers, which could depress the market price of our common stock.

Delaware Anti-Takeover Law.    Our amended and restated certificate of incorporation provides that Section 203 of the Delaware General Corporation Law, an anti-takeover law, will not apply to us. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years following the date the person became an interested stockholder, unless the “business combination” or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an “interested stockholder” is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation’s voting stock.

Indemnification of Directors and Officers and Limitation of Liability

Our certificate of incorporation and by-laws generally eliminate the personal liability of our directors for breaches of fiduciary duty as a director and indemnify directors and officers to the fullest extent permitted by the Delaware General Corporation Law.

 

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We intend to enter into indemnity agreements with each of our directors and executive officers, which will provide for mandatory indemnity of an executive officer or director made party to a “proceeding” by reason of the fact that the indemnitee is or was an executive officer or director of ours, if the indemnitee acted in good faith and in a manner the indemnitee reasonably believed to be in or not opposed to our best interests and, in the case of a criminal proceeding, the indemnitee had no reasonable cause to believe that the indemnitee’s conduct was unlawful. These agreements will also obligate us to advance expenses to an indemnitee provided that the indemnitee will repay advanced expenses in the event the indemnitee is not entitled to indemnification. Indemnitees are also entitled to partial indemnification and indemnification for expenses incurred as a result of acting at our request as a director, officer or agent of an employee benefit plan or other partnership, corporation, joint venture, trust or other enterprise owned or controlled by us.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the above statutory provisions or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Corporate Opportunity

Under our amended and restated certificate of incorporation, Fortress has the right, to and has no duty to abstain from exercising such right to, engage or invest in the same or similar business as us, do business with any of our clients, customers or vendors or employ or otherwise engage any of our officers, directors or employees. If Fortress, any of its affiliates or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty to offer such corporate opportunity to us, our stockholders or affiliates. We have renounced any interest or expectancy in, or in being offered an opportunity to participate in, such corporate opportunities in accordance with Section 122(17) of the Delaware General Corporation Law.

In the event that any of our directors and officers who is also a director, officer or employee of Fortress acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as our director or officer and such person acted in good faith, then such person is deemed to have fully satisfied such person’s fiduciary duty and is not liable to us if Fortress pursues or acquires such corporate opportunity or if such person did not present the corporate opportunity to us.

Registration Rights

Some of our stockholders have the right to require us to register common stock for resale in some circumstances. See “Certain Relationships and Related Transactions.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is             .

Listing

We intend to list our common stock on the New York Stock Exchange under the symbol “        .”

 

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock and we cannot predict the effect, if any, that market sales of shares or availability of any shares for sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of common stock (including shares issued on the exercise of options, warrants or convertible securities, if any), or the perception that such sales could occur, could adversely affect the market price of our common stock and our ability to raise additional capital through a future sale of securities.

All of the             shares being sold in the offering (assuming no exercise of the underwriters’ over-allotment option) will be fully tradable without restriction or further registration under the Securities Act, unless held by an affiliate, as that term is defined in Rule 144 under the Securities Act. The remaining         outstanding shares of our common stock will continue to be restricted securities as that term is defined in Rule 144 under the Securities Act. These shares may not be sold unless registered under the Securities Act or sold pursuant to an applicable exemption from registration, including the exemption under Rule 144.

In addition to the outstanding shares of common stock, we intend to file a registration statement on Form S-8 to register an aggregate of              shares of common stock under the GateHouse Media, Inc. Omnibus Stock Incentive Plan.

Lock-Up Agreements

Beneficial owners of             shares of common stock will be subject to lockup agreements with the underwriters that will restrict the sale of these shares for         days. See “Underwriting.”

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of this offering, a person who has beneficially owned shares that are restricted securities for at least one year, including the holding period of any prior owner other than one of our affiliates, is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:

 

  Ÿ   1% of the then outstanding shares of common stock, which will be approximately             shares after the offering; or

 

  Ÿ   the average weekly trading volume of our common stock on the New York Stock Exchange during the four calendar weeks preceding the date on which notice of such sale is filed pursuant to Rule 144.

Sales under Rule 144 are also subject to certain provisions regarding the manner of sale, notice requirements and the availability of current public information about us. Rule 144 also provides that affiliates that sell our common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares, other than the holding period requirement.

Rule 144(k)

A person who is not deemed to have been an affiliate of ours at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell his or her shares under Rule 144(k) without regard to the volume limitations and other restrictions described above. We are unable to estimate the number of shares that will be sold under Rule 144 because this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors beyond our control.

Registration Rights

Upon completion of the offering, holders of              shares of our common stock will have certain registration rights. See “Certain Relationships and Related Transactions.”

 

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

Non-U.S. Holders

The following is a summary of certain U.S. federal income and estate tax consequences of the acquisition, ownership and disposition of our common stock by a holder that is a “non-U.S. holder,” as we define that term below. A beneficial owner of our common stock who is not a U.S. person is referred to below as a “non-U.S. holder.” This summary is based upon current provisions of the Code, Treasury regulations promulgated thereunder, judicial opinions, administrative rulings of the U.S. Internal Revenue Service (the “IRS”) and other applicable authorities, all as in effect as of the date hereof. These authorities may be changed, possibly retroactively, resulting in U.S. federal tax consequences different from those set forth below. We have not sought, and will not seek, any ruling from the IRS or opinion of counsel with respect to the statements made in the following summary and there can be no assurance that the IRS will not take a position contrary to such statements or that any such contrary position taken by the IRS would not be sustained.

This summary is limited to non-U.S. holders who hold our common stock as a capital asset (generally, property held for investment). This summary also does not address the tax considerations arising under the laws of any foreign, state or local jurisdiction, or under United States federal estate or gift tax laws (except as specifically described below). In addition, this summary does not address all aspects of U.S. federal tax considerations that may be applicable to an investor’s particular circumstances.

A “non-U.S. holder” is a person or entity that, for U.S. federal income tax purposes, is a:

 

  Ÿ   non-resident alien individual, other than certain former citizens and residents of the United States subject to tax as expatriates,

 

  Ÿ   foreign corporation, or

 

  Ÿ   foreign estate or trust.

A “non-U.S. holder” does not include an individual who is present in the United States for 183 days or more in the taxable year of disposition and is not otherwise a resident of the United States for U.S. federal income tax purposes. Such an individual is urged to consult his or her own tax advisor regarding the U.S. federal income tax consequences of the sale, exchange or other disposition of common stock.

Dividends

If distributions are paid on shares of our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, and any excess will constitute a return of capital that is applied against and reduces your adjusted tax basis in our common stock and then any remainder will constitute gain on the common stock. Dividends paid to a non-U.S. holder will generally be subject to withholding of U.S. federal income tax at the rate of 30% or such lower rate as may be specified by an applicable income tax treaty. If, however, the dividend is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States or, if a tax treaty applies, attributable to a U.S. permanent establishment maintained by such non-U.S. holder, the dividend will not be subject to any withholding tax (provided certain certification requirements are met, as described below) but will be subject to U.S. federal income tax imposed on net income on the same basis that applies to U.S. persons generally and, for corporate holders under certain circumstances, the branch profits tax.

 

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In order to claim the benefit of a tax treaty or to claim exemption from withholding because the income is effectively connected with the conduct of a trade or business in the U.S., a non-U.S. holder must provide a properly executed IRS Form W-8BEN for treaty benefits or IRS Form W-8ECI for effectively connected income (or such successor forms as the IRS designates), prior to the payment of dividends. These forms must be periodically updated. Non-U.S. holders may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund.

Gain on Disposition

A non-U.S. holder will generally not be subject to U.S. federal income tax, including by way of withholding, on gain recognized on a sale or other disposition of our common stock unless:

 

  Ÿ   the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States or, if a tax treaty applies, is attributable to a U.S. permanent establishment maintained by such non-U.S. holder; or

 

  Ÿ   our common stock constitutes a U.S. real property interest by reason of our status as a “United States real property holding corporation” (a “USRPHC”) for U.S. federal income tax purposes at any time during the shorter of (i) the period during which you hold our common stock or (ii) the five-year period ending on the date you dispose of our common stock.

We believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our United States real property interests relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we were treated as a USRPHC, as long as our common stock is regularly traded on an established securities market, such common stock generally will not be treated as United States real property interests.

U.S. Federal Estate Taxes

Our common stock owned or treated as owned by an individual who at the time of death is a non-U.S. holder will be included in his or her estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding

Information returns will be filed with the IRS in connection with payments of dividends and the proceeds from a sale or other disposition of common stock. You may have to comply with certification procedures to establish that you are not a United States person in order to avoid information reporting and backup withholding tax requirements. The certification procedures required to claim a reduced rate of withholding under a treaty will satisfy the certification requirements necessary to avoid the backup withholding tax as well. The amount of any backup withholding from a payment to you will be allowed as a credit against your United States federal income tax liability and may entitle you to a refund, provided that the required information is furnished to the IRS.

 

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UNDERWRITING

The company and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co. and Wachovia Capital Markets, LLC are the representatives of the underwriters.

 

Underwriters

   Number of Shares

Goldman, Sachs & Co.

  

Wachovia Capital Markets, LLC

  
    

Total

  
    

The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised.

If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional             shares from the company to cover such sales. They may exercise that option for 30 days after the consummation of the offering. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by the company. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase             additional shares.

 

Paid by the Company

   No Exercise    Full Exercise

Per share

   $                 $             

Total

   $      $  

Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $             per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $             per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms.

The company and its officers, directors and holders of substantially all of the company’s common stock (other than shares being sold in the offering) have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 120 days after the date of this prospectus, except with the prior written consent of the representatives. This agreement does not apply to any existing employee benefit plans. See “Shares Eligible for Future Sale” for a discussion of certain transfer restrictions.

The 120-day restricted period described in the preceding paragraph will be automatically extended if: (1) during the last 17 days of the 120-day restricted period the company issues an earnings release or announces material news or a material event; or (2) prior to the expiration of the 120-day restricted period, the company announces that it will release earnings results during the 15-day period following the last day of the 120-day period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.

 

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Prior to the offering, there has been no public market for the shares. The initial public offering price has been negotiated among the company and the representatives. Among the factors considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, were the company’s historical performance, estimates of the business potential and earnings prospects of the company, an assessment of the company’s management and the consideration of the above factors in relation to market valuation of companies in related businesses.

An application will be made to list the common stock on the New York Stock Exchange under the symbol “      ”. In order to meet one of the requirements for listing the common stock on the New York Stock Exchange, the underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders.

In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares from the company in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option granted to them. “Naked” short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of the company’s stock and, together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the New York Stock Exchange, in the over-the-counter market or otherwise.

Each of the underwriters has represented and agreed that:

 

  (a) it has not made or will not make an offer of shares to the public in the United Kingdom within the meaning of section 102B of the Financial Services and Markets Act 2000 (as amended) (FSMA) except to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances which do not require the publication by the company of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority;

 

  (b)

it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) to persons who have professional experience in

 

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matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which section 21 of FSMA does not apply to the company; and

 

  (c) it has complied with and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), each Underwriter has represented and agreed that, with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date), it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:

 

  (a) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;

 

  (b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; or

 

  (c) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of shares to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

The shares may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus’ within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or

 

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distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A) and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to and in accordance with the conditions of, any other applicable provision of the SFA.

Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A) and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.

The securities have not been and will not be registered under the Securities and Exchange Law of Japan (the Securities and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.

Affiliates of Goldman, Sachs & Co. and Wachovia Capital Markets, LLC are lenders under our credit facilities which we will repay using the net proceeds of this offering. Because Goldman, Sachs & Co. and Wachovia Capital Markets, LLC are underwriters and may receive more than 10% of the entire net proceeds in this offering, the underwriters may be deemed to have a “conflict of interest” under Rule 2710(h) of the Conduct Rules of the National Association of Securities Dealers, Inc. Accordingly, this offering will be made in compliance with the applicable provisions of Rule 2720 of the conduct rules. Rule 2720 requires that the initial public offering price can be no higher than that recommended by a “qualified independent underwriter,” as defined by the NASD.                      has served in that capacity and performed due diligence investigations and reviewed and participated in the preparation of the registration statement of which this prospectus forms a part.

At the company’s request, the underwriters have reserved for sale at the initial public offering price up to                  shares offered hereby for officers, directors, employees and certain other persons associated with the company and members of their respective families. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. The company has agreed with the underwriters that any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. The company has agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the reserved shares.

The underwriters do not expect sales to discretionary accounts to exceed 5% of the total number of shares offered. The underwriters will not execute sales to discretionary accounts without the prior written specific approval of the customers.

 

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The company estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $            .

The company has agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act.

Certain of the underwriters and their respective affiliates have, from time to time, performed and may in the future perform, various financial advisory and investment banking services for the company, for which they received or will receive customary fees and expenses. In particular, affiliates of Goldman, Sachs & Co. and Wachovia Capital Markets, LLC are arrangers and lenders under our credit facilities.

 

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LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed upon for us by our counsel, Willkie Farr & Gallagher LLP, 787 Seventh Avenue, New York, New York 10019. Certain legal matters will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York 10036. Willkie Farr & Gallagher LLP and Skadden, Arps, Slate, Meagher & Flom LLP have represented and continue to represent Fortress in connection with matters unrelated to the offering.

EXPERTS

The consolidated financial statements of GateHouse Media, Inc. and subsidiaries as of December 31, 2004 and 2005, for the years ended December 31, 2003 and 2004 and for the periods from January 1, 2005 to June 5, 2005 and June 6, 2005 to December 31, 2005, have been included in the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing. The audit report covering the December 31, 2005 consolidated financial statements contains explanatory paragraphs stating that the Company changed to June 30 the date on which the annual impairment assessment of goodwill and mastheads is made and as a result of the June 6, 2005 acquisition of GateHouse Media, Inc. accounted for as a business combination, the consolidated financial information for the period after the acquisition is presented on a different cost basis than for the periods prior to the acquisition.

The financial statements of CP Media as of July 3, 2005 and April 2, 2006 and for each of the fiscal years ended June 27, 2004 and July 3, 2005 and for the nine (9) month period ended April 2, 2006, included in this registration statement have been so included in reliance on the report (which contains an explanatory paragraph relating the presentation of the financial statements and the change in accounting principle relating to redeemable preferred stock) of PricewaterhouseCoopers LLP, an independent accounting firm, given on the authority of said firm as experts in auditing and accounting.

The consolidated statements of operations, of cash flows and of shareholders’ deficit, members’ interest and comprehensive income (loss) of Enterprise NewsMedia, Inc. for the period from January 1, 2003 through March 31, 2003 and the consolidated statements of operations, of cash flows and of shareholders’ deficit, members’ interest and comprehensive income (loss) of Enterprise NewsMedia, LLC for the period from April 1, 2003 through December 31, 2003 included in this registration statement have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of Enterprise NewsMedia, LLC and subsidiaries as of December 31, 2004 and 2005, and for each of the years in the two-year period ended December 31, 2005, have been included in the registration statement in reliance upon the reports of Grant Thornton LLP, independent registered public accounting firm, appearing elsewhere in this prospectus and upon the authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the offer and sale of common stock pursuant to this prospectus. This prospectus, filed as a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules thereto as permitted by the rules and regulations of the SEC.

 

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Reference is made to each such exhibit for a more complete description of the matters involved. For further information about us and our common stock, you should refer to the registration statement. The registration statement and the exhibits and schedules thereto filed with the SEC may be inspected, without charge and copies may be obtained at prescribed rates, at the public reference facility maintained by the SEC at its Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers, including us, that file electronically with the SEC. The address of this website is http://www.sec.gov. You may also contact the SEC by telephone at (800) 732-0330.

Upon the effectiveness of the registration statement, we will be subject to the informational requirements of the Exchange Act, and, in accordance with the Exchange Act, will file reports, proxy and information statements and other information with the Commission. Such annual, quarterly and special reports, proxy and information statements and other information can be inspected and copied at the locations set forth above. We will report our financial statements on a calendar year ending December 31. We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent registered public accounting firm and with quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year.

 

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INDEX TO FINANCIAL STATEMENTS

 

Unaudited Pro Forma Condensed Consolidated Financial Information of GateHouse Media, Inc.

  

General Information

   F-3

Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2006.

   F-4

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2005

   F-8

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the three months ended March 31, 2006

   F-9

Notes and Management’s Assumptions to Unaudited Pro Forma Condensed Consolidated Financial Statements

   F-10

Audited Consolidated Financial Statements of GateHouse Media, Inc.

  

Report of Independent Registered Public Accounting Firm

   F-13

Consolidated Balance Sheets as of December 31, 2004 and 2005.

   F-14

Consolidated Statements of Operations for the years ended December 31, 2003 and 2004 and for the periods from January 1, 2005 to June 5, 2005 and from June 6, 2005 to December 31, 2005

   F-15

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2003 and 2004 and for the periods from January 1, 2005 to June 5, 2005 and from June 6, 2005 to December 31, 2005

   F-16

Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2004 and for the periods from January 1, 2005 to June 5, 2005 and from June 6, 2005 to December 31, 2005

   F-17

Notes to Consolidated Financial Statements

   F-18

Unaudited Condensed Consolidated Interim Financial Statements of GateHouse Media, Inc.

  

Condensed Consolidated Balance Sheet as of March 31, 2006

   F-44

Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2006

   F-45

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2006

   F-46

Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the three months ended March 31, 2006

   F-47

Notes to Condensed Consolidated Financial Statements

   F-48

Audited Financial Statements of CP Media

  

Report of Independent Auditors

   F-53

Balance Sheets as of July 3, 2005 and April 2, 2006.

   F-54

Statements of Operations for the years ended June 27, 2004, July 3, 2005 and for the nine months ended April 2, 2006

   F-55

Statements of Changes in Redeemable Preferred Stock and Parent Company Deficit for the years ended June 27, 2004, July 3, 2005 and for the nine months ended April 2, 2006

   F-56

Statements of Cash Flows for the years ended June 27, 2004, July 3, 2005 and for the nine months ended April 2, 2006

   F-57

Notes to Financial Statements

   F-58

Audited Consolidated Financial Statements of Enterprise NewsMedia, LLC

  

Reports of Independent Registered Public Accounting Firms

   F-75

Consolidated Balance Sheets as of December 31, 2004 and 2005.

   F-78

Consolidated Statements of Operations for the period from January 1, 2003 through March 31, 2003, the period from April 1, 2003 through December 31, 2003 and the years ended December 31, 2004 and 2005

   F-79

 

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Consolidated Statements of Cash Flows for the period from January 1, 2003 through March 31, 2003, the period from April 1, 2003 through December 31, 2003 and the years ended December 31, 2004 and 2005

   F-80

Consolidated Statements of Shareholders’ Deficit, Member’s Interest and Comprehensive Income (Loss) for the period from January 1, 2003 through March 31, 2003, the period from April 1, 2003 through December 31, 2003 and the years ended December 31, 2004 and 2005

   F-82

Notes to Consolidated Financial Statements

   F-85

Unaudited Condensed Interim Financial Statements of Enterprise NewsMedia, LLC

  

Condensed Consolidated Balance Sheet as of March 31, 2006

   F-103

Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2006

   F-104

Condensed Consolidated Statements of Member’s Interest and Comprehensive Income (Loss) for the three months ended March 31, 2006

   F-105

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2006

   F-106

Notes to Condensed Consolidated Financial Statements

   F-107

 

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GATEHOUSE MEDIA, INC.

Unaudited Pro Forma Condensed Consolidated Financial Information

As of March 31, 2006

(In thousands)

General Information

The following unaudited pro forma condensed consolidated financial information sets forth the historical financial information as of and for the three months ended March 31, 2006 and for the year ended December 31, 2005 derived from our historical consolidated financial statements. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2005 gives effect to each of the following as if they had occurred on January 1, 2005:

 

  Ÿ   the merger of a wholly owned subsidiary of FIF III Liberty Holdings LLC, an affiliate of Fortress Investment Group LLC, with and into our predecessor on June 6, 2005 (the “Merger”);

 

  Ÿ   the acquisition of substantially all of the assets, and the assumption of certain liabilities, of CP Media on June 6, 2006 (the “CNC Acquisition”);

 

  Ÿ   the acquisition of all the equity interests of Enterprise NewsMedia, LLC on June 6, 2006 (the “Enterprise Acquisition” and, together with the CNC Acquisition, the “Acquisitions”);

 

  Ÿ   the entry into a $610.0 million first lien credit facility, consisting of a $570.0 million term loan facility and a $40.0 million revolving facility, and a $152.0 million second lien term loan facility, on June 6, 2006 in connection with the Acquisition (the “2006 Financing”);

 

  Ÿ the initial public offering of our common stock described in the prospectus in which this unaudited pro forma financial information is included (the “Offering”) assuming the sale of                  shares of our common stock at an assumed Offering price of $             per share, the midpoint of the range set forth on the cover of the prospectus in which this unaudited pro forma financial information is included; and

 

  Ÿ   the tax effects of each of the above.

The unaudited pro forma condensed consolidated balance sheet information as of March 31, 2006 gives effect to the Acquisitions, the 2006 Financing and the Offering, as well as the tax effects of each of them, as if they had occurred on March 31, 2006.

The unaudited pro forma financial statements do not purport to represent what our results of operations or financial position would have been if these transactions had occurred on the date indicated and are not intended to project our results of operations or financial position for any future period or date.

The unaudited pro forma adjustments are based on estimates, available information and certain assumptions that we believe are reasonable and may be revised as additional information becomes available. The pro forma adjustments and primary assumptions are described in the accompanying notes.

You should read the unaudited pro forma financial information below along with all other financial information and analysis presented in this prospectus, including the sections captioned “Description of Certain Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and GateHouse Media, Inc.’s historical consolidated financial statements and related notes included elsewhere in this prospectus.

 

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GATEHOUSE MEDIA, INC.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

As of March 31, 2006

(In thousands)

 

   

GateHouse

Media

(A)

   

Enterprise

(B)

   

CNC

(C)

   

Adjustments

(D)

    Pro forma    

Offering

adjustments

(E)

 

Pro forma

as adjusted

Assets:              

Cash and cash equivalents

  $ 992     $ 2,315     $ —       $ 26,556 (1)   $ 29,863     $     $  

Accounts receivables, net

    22,261       6,646       9,315       (53 )(2)     38,169      

Inventory

    3,673       772       661       —         5,106      

Deferred income taxes

    2,121       —         —         —         2,121      

Other current assets

    1,693       712       2,098       (457 )(2)     4,046      
                                                   

Total current assets

    30,740       10,445       12,074       26,046       79,305      

Property, plant and equipment, net

    58,450       22,269       12,435       8,591 (2,3)     101,745      

Goodwill

    316,717       74,841       103,441       12,677 (4)     507,676      

Intangible assets, net

    214,704       61,134       6,667       121,090 (5)     403,595      

Deferred financing costs, net

    723       1,518       1,674       1,851 (6)     5,766      

Interest rate swap agreement

    —         595       —         (595 )(2)     —        

Other assets

    17,602       95       1,724       (1,724 )(2)     17,697      
                                                   

Total assets

  $ 638,936     $ 170,897     $ 138,015     $ 167,936     $ 1,115,784     $     $  
                                                   
Liabilities and Stockholders’ Equity:              

Current portion of long-term debt

  $ 3,071     $ 6,062     $ 975     $ (10,108 )(2,7)   $ —       $     $  

Current portion of long-term liabilities

    224       375       —         (375 )(2)     224      

Accounts payable

    1,405       2,085       4,954       (1,259 )(2)     7,185      

Accrued expenses and other liabilities

    8,424       3,435       1,919       (746 )(2,7)     13,032      

Deferred revenue

    9,145       2,181       4,084       —         15,410      
                                                   

Total current liabilities

    22,269       14,138       11,932       (12,488 )     35,851      

Revolving credit loan

    6,090       —         —         25,910 (7)     32,000      

Long-term debt, less current portion

    300,587       78,042       119,472       223,899 (7)     722,000      

Deferred income taxes

    74,044       —         11,543       (9,932 )(8)     75,655      

Other long-term liabilities

    432       387       2,092       (1,560 )(2)     1,351      

Pension and other post-retirement benefit obligations

    —         16,261       —         (2,848 )(9)     13,413      

Redeemable preferred stock

    —         —         47,960       (47,960 )(2)     —        
                                                   

Total liabilities

    403,422       108,828       192,999       175,021       880,270      

Common stock

    2       82,578       —         (82,578 )(10)     2      

Additional paid-in capital

    223,343       —         —         —         223,343      

Unearned compensation

    —         (44 )     —         44 (10)     —        

Note receivable

    (250 )     —         —         —         (250 )    

Distributions

    —         (19,480 )     —         19,480 (10)     —        

Accumulated other comprehensive income

    2,272       595       —         (595 )(10)     2,272      

Retained earnings (deficit)

    10,147       (1,580 )     (54,984 )     56,564 (10)     10,147      
                                                   

Total liabilities and stockholders’ equity

  $ 638,936     $ 170,897     $ 138,015     $ 167,936     $ 1,115,784     $     $             
                                                   

See accompanying notes.

 

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GATEHOUSE MEDIA, INC.

Notes and Management’s Assumptions to Unaudited

Pro Forma Condensed Consolidated Financial Statements

(In thousands)

 

1. Adjustments to Pro Forma Condensed Consolidated Balance Sheet

 

  (A) GateHouse Media, Inc.

Reflects historical consolidated statement of financial position for GateHouse Media, Inc. (the “Company”) as of March 31, 2006.

 

  (B) Enterprise NewsMedia, LLC

Reflects historical consolidated statement of financial position for Enterprise NewsMedia, LLC (“Enterprise”) as of March 31, 2006

 

  (C) CP Media

Reflects historical statement of financial position for CP Media (“Community Newspaper Company” or “CNC”) as of April 2, 2006.

 

  (D) Adjustments

 

  (1) Reflects the net adjustment of the consolidated cash position due to changes in net assets and liabilities and cash balance after the Acquisitions and 2006 Financing.
  (2) Reflects the elimination of certain assets and liabilities included in the historical balance sheet of Enterprise and CNC but not purchased by the Company, the most significant of which includes the CNC redeemable preferred stock for $47,960.
  (3) Reflects the purchase adjustments to record property, plant and equipment at fair value. Fair value was determined based on preliminary valuations.

Fair value of property, plant and equipment acquired:

 

Enterprise

   $ 23,761   

CNC

     19,534   
         
      $ 43,295

Elimination of book value of assets acquired:

 

Enterprise

   (22,269 )  

CNC

   (12,435 )  
        
       (34,704 )
          

Adjustment to property, plant and equipment

     $ 8,591  
          

The elimination of the book value of assets acquired in connection with the Enterprise Acquisition in the amount of $22,269 includes $10,251 relating to two properties not acquired by the Company.

 

  (4) On June 6, 2006, the Company consummated the Acquisitions and acquired substantially all of the assets, and assumed certain liabilities of CNC and directly or indirectly acquired all of the equity interests of Enterprise.

 

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GATEHOUSE MEDIA, INC.

Notes and Management’s Assumptions to Unaudited

Pro Forma Condensed Consolidated Financial Statements—(Continued)

(In thousands)

 

The total purchase price for the Acquisitions, including transaction costs, was $413,304, subject to adjustment. The following table summarizes the components of the purchase price and the fair value of the assets acquired and liabilities assumed as of March 31, 2006. The estimates of the fair value of assets acquired are based on preliminary valuations.

 

     Enterprise     CNC     Total  

Components of the purchase price:

      

Cash consideration

   $ 182,315     $ 230,000     $ 412,315  

Payment of fees and expenses

     719       783       1,502  

Payment of working capital settlement

     (930 )     417       (513 )
                        

Total purchase price

     182,104       231,200       413,304  

Fair value of assets acquired and liabilities assumed:

      

Current assets

     10,445       11,564       22,009  

Other assets

     95       —         95  

Property, plant and equipment

     23,761       19,534       43,295  

Intangible assets

     88,702       100,189       188,891  
                        

Total assets

     123,003       131,287       254,290  

Current liabilities

     6,307       9,697       16,004  

Deferred income taxes

     529       1,082       1,611  

Other long-term liabilities

     13,800       530       14,330  
                        

Total liabilities

     20,636       11,309       31,945  
                        

Net assets acquired

     102,367       119,978       222,345  
                        

Goodwill (total purchase price less net assets acquired)

     79,737       111,222       190,959  

Elimination of historical goodwill

     (74,841 )     (103,441 )     (178,282 )
                        
   $ 4,896     $ 7,781     $ 12,677  
                        

 

  (5) Reflects the purchase adjustments to record intangible assets at fair value.

Fair value of intangible assets acquired:

 

     Life in
Years
   Enterprise    CNC    Total

Subscriber relationships

   14-18    $ 22,370    $ 10,781    $ 33,151

Advertiser lists

   15-18      55,200      76,194      131,394

Mastheads

   Indefinite      10,146      13,214      23,360

Non-compete agreements

   2      986      —        986
                       
      $ 88,702    $ 100,189    $ 188,891
                       

Elimination of historical amounts:

 

Enterprise

     (61,134 )

CNC

     (6,667 )
        

Pro forma adjustment

   $ 121,090  
        

 

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GATEHOUSE MEDIA, INC.

Notes and Management’s Assumptions to Unaudited

Pro Forma Condensed Consolidated Financial Statements—(Continued)

(In thousands)

 

  (6) Reflects the write-off of historical deferred financing costs and capitalization of new debt issuance costs in connection with the 2006 Financing.

 

Eliminate unamortized deferred financing costs—historical debt

   $ (3,915 )

Capitalize deferred financing costs—pro forma debt

     5,766  
        

Pro forma adjustment

   $ 1,851  
        

 

  (7) The pro forma adjustments relating to the Acquisitions and related 2006 Financing is comprised of:

 

     Eliminate
historical
debt
    2006
Refinancing
   Pro forma
adjustments
 

Current portion of long-term debt

   $ (10,108 )   $ —      $ (10,108 )

Revolving credit loan

   $ (6,090 )   $ 32,000    $ 25,910  

Long-term debt

   $ (498,101 )   $ 722,000    $ 223,899  

The 2006 Financing in the amount of $754 million reflects $570 million of borrowings under the first lien credit facility; $32 million of borrowings under the first lien revolving credit facility; and $152 million of borrowings under the second lien term loan facility.

 

  (8) The pro forma adjustment to deferred income taxes reflects the difference between book and tax bases, primarily intangible assets, at an estimated 40% statutory tax rate.

 

  (9) The pro forma adjustment to pension and other post-retirement benefit obligations reflects the projected benefit obligation net of the fair value of plan assets assuming the Acquisitions took place on March 31, 2006 and is comprised of:

 

Projected benefit obligation

   $ 29,365  

Fair value of plan assets

     15,952  
        

Net accrued benefit cost

     13,413  

Elimination of historical pension obligation

     (16,261 )
        

Pro forma pension adjustment

   $ (2,848 )
        

 

  (10) Reflects adjustments to eliminate the historical equity of CNC and Enterprise.

 

  (E) Offering Adjustments

Following is a summary of the Offering adjustments to reflect the net proceeds received from the Offering and the use of the proceeds:

 

Gross Offering proceeds from the assumed sale of
                     common shares at $                     per share

  

Less Offering costs and underwriters’ discount

   $             
      

Net proceeds from Offering

  

Repayment of second lien term loan facility

  
      

Total use of proceeds

  
      

Net excess cash from Offering

   $  
      

 

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GATEHOUSE MEDIA, INC.

Unaudited Pro Forma Condensed Consolidated Statement of Operations

For the Year Ended December 31, 2005

(In thousands, except per share amounts)

 

   

GateHouse

Media

(A)

   

GateHouse

Media

(A)

    Enterprise
(B)
   

CNC

(C)

   

Adjustments

(D)

   

Pro

forma

   

Offering

adjustments

(E)

 

Pro forma

as adjusted

    (Predecessor)     (Successor)                                  

Revenues:

               

Advertising

    $ 63,172     $ 88,798     $ 57,135     $ 86,540     $         —       $ 295,645     $                  $               

Circulation

    14,184       19,298       21,406       11,197       —         66,085      

Online, Commercial printing & other

    8,134       11,415       438       2,763       —         22,750      
                                                           

Total revenues

    85,490       119,511       78,979       100,500       —         384,480      

Operating costs and expenses:

               

Operating costs

    40,007       61,001       24,830       58,925       —         184,763      

Selling, general and administrative

    26,978       30,035       39,729       22,891       —         119,633      

Depreciation and amortization

    5,776       8,030       6,375       4,289       5,643 (1)     30,113      

Transaction costs related to Merger

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

Other

    —         (40 )     —         48       —         8      

Pension and post-retirement

    —         —         992       —         —         992      
                                                           

Total operating expenses

    80,464       101,876       71,926       86,153       5,643       346,062      
                                                           
               

Operating income (loss)

    5,026       17,635       7,053       14,347       (5,643 )     38,418      

Interest expense:

               

Debt

    13,232       11,760       5,070       8,119       11,215  (3)     49,396      

Other interest expense

    13,484       —         16       2,819       (16,319 )(3)     —        

Amortization of deferred financing costs

    643       67       233       304       (485 )(5)     762      

Gain on termination of hedge accounting for interest rate swaps

    —         (10,807 )     —         —         10,807  (4)     —        

Loss on extinguishment of debt

    5,525       —         —         —         —         5,525      

Write-off of deferred loan costs

    —         —         2,025       —         (2,025 )(5)     —        

Other expense (income)

    —         —         (216 )     —         194  (6)     (22 )    
                                                           

Income (loss) before taxes

    (27,858 )     16,615       (75 )     3,105       (9,030 )     (17,243 )    
                                                           

Income tax expense (benefit)

    (3,027 )     7,050       —         3,319       (3,612 )(7)     3,730      
                                                           

Income (loss) from continuing operations

    $(24,831)     $ 9,565     $ (75 )   $ (214 )   $ (5,418 )   $ (20,973 )   $          $       
                                                           

Weighted average shares outstanding

               

Basic

    2,158,833       226,400             226,400      

Diluted

    2,158,833       226,400             226,400      

Income (loss) per share—continuing operations

               

Basic

  $ (11.50 )   $ 42.25           $ (92.64 )     $  

Diluted

  $ (11.50 )   $ 42.25           $ (92.64 )     $  

See accompanying notes.

 

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Table of Contents

GATEHOUSE MEDIA, INC.

Unaudited Pro Forma Condensed Consolidated Statement of Operations

For the Three Months Ended March 31, 2006

(In thousands, except per share amounts)

 

   

GateHouse
Media

(A)

    Enterprise
(B)
   

CNC

(C)

    Adjustments
(D)
    Pro forma     Offering
adjustments
(E)
 

Pro forma

as adjusted

Revenues:

             

Advertising

  $ 36,459     $ 13,072     $ 19,841     $ —       $ 69,372     $                $             

Circulation

    8,495       5,137       2,679       —         16,311      

Online, Commercial printing & other

    5,021       128       698       —         5,847      
                                                   

Total revenue

    49,975       18,337       23,218       —         91,530      

Operating costs and expenses:

             

Operating costs

    25,789       5,956       14,034       —         45,779      

Selling, general and administrative

    16,476       10,525       5,412       —         32,413      

Depreciation and amortization

    3,599       1,532       855       1,214 (1)     7,200      

Transaction costs related to Merger

    —         —         —         —         —        

Other

    441       —         (4 )     —         437      

Pension and post-retirement

    —         509       —         239  (2)     748      
                                                   

Total operating expenses

    46,305       18,522       20,297       1,453       86,577      
                                                   

Operating income (loss)

    3,670       (185 )     2,921       (1,453 )     4,953      

Interest expense:

             

Debt

    5,176       1,391       2,424       3,930  (3)     12,921      

Other interest expense

    —         1       1,471       (1,472 )(3)     —        

Amortization of deferred financing costs

    31       55       81       23  (5)     190      

Unrealized Gain on Derivative

    (2,605 )     —         —         2,605  (4)     —        

Other expense (income)

    —         (54 )     —         50  (6)     (4 )    
                                                   

Income (loss) before taxes

    1,068       (1,578 )     (1,055 )     (6,589 )     (8,154 )    
                                                   

Income tax expense (benefit)

    486       —         265       (2,635 )(7)     (1,884 )    
                                                   

Income (loss) from continuing operations

  $ 582     $ (1,578 )   $ (1,320 )   $ (3,954 )   $ (6,270 )   $     $  
                                                   

Weighted average shares outstanding

             

Basic

    227,644             227,644      

Diluted

    227,644             227,644      

Loss per share—continuing operations

             

Basic

  $ 2.56           $ (27.54 )     $  

Diluted

  $ 2.56           $ (27.54 )     $  

See accompanying notes.

 

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Table of Contents

GATEHOUSE MEDIA, INC.

Notes and Management’s Assumptions to Unaudited

Pro Forma Condensed Consolidated Financial Statements

(In thousands)

 

2. Adjustments to Pro Forma Condensed Consolidated Statements of Operations

 

  (A) GateHouse Media, Inc.

Reflects historical consolidated statement of operations for the Company for the period from January 1, 2005 to June 5, 2005 (predecessor period), the period from June 6, 2005 to December 31, 2005 (successor period) and for the three month period ended March 31, 2006.

 

  (B) Enterprise NewsMedia, LLC

Reflects historical consolidated statement of operations for Enterprise for the year ended December 31, 2005 and the three month period ended March 31, 2006.

 

  (C) CP Media

The historical results of operations for the calendar year ended December 31, 2005 included in the pro forma condensed statement of operations have been derived from the historical financial statements of CP Media for the fiscal year ended July 3, 2005 and the nine months ended April 2, 2006.

 

  (D) Adjustments

 

  (1) Reflects the adjustment to record incremental depreciation and amortization on the purchase adjustment to record the acquired assets at fair value using the straight line method over the remaining estimated useful lives.

 

     GateHouse
Media
    Enterprise     CNC     Total year
ended
December 31,
2005
 

Pro forma depreciation expense:

   $ 2,022     $ 3,973     $ 1,667     $ 7,662  

Less: historical depreciation expense

     (2,150 )     (2,073 )     (2,791 )     (7,014 )

Pro forma amortization—Long-term intangibles

     3,602       5,141       5,678       14,421  

Less: historical amortization expense

     (3,626 )     (4,302 )     (1,498 )     (9,426 )
                                

Total pro forma depreciation and amortization expense adjustment

   $ (152 )   $ 2,739     $ 3,056     $ 5,643  
                                

 

     Enterprise     CNC     Total three
months ended
March 31, 2006
 

Pro forma depreciation expense:

   $ 478     $ 417     $ 895  

Less: historical depreciation expense

     (470 )     (488 )     (958 )

Pro forma amortization—Long-term intangibles

     1,286       1,420       2,706  

Less: historical amortization expense

     (1,062 )     (367 )     (1,429 )
                        

Total pro forma depreciation and amortization expense adjustment

   $ 232     $ 982     $ 1,214  
                        

 

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Table of Contents

GATEHOUSE MEDIA, INC.

Notes and Management’s Assumptions to Unaudited

Pro Forma Condensed Consolidated Financial Statements—(Continued)

(In thousands)

 

  (2) Reflects the adjustment to pension and post-retirement expense for Enterprise based on the fair value adjustment of pension assets and obligations.

 

     Three months ended
March 31, 2006
 

Adjusted pension expense

   $ 748  

Less: Historical pension expense

     (509 )
        

Net adjustment to pension and post retirement expense

   $ 239  
        

 

  (3) Represents adjustment to reflect the interest expense of the 2006 Financing for the period presented. The pro forma interest expense for the year ended December 31, 2005 is calculated using the following assumed interest rates: (1) average LIBOR (4.71%) plus 2.25% for the first lien term loan, (2) average LIBOR (3.31%) plus 1.50% for the second lien term loan and (3) average Alternate Base Rate, as defined in the agreement entered into in connection with the new credit facility, which was 6.10%, plus 1.0% for the revolving credit facility which is part of the new credit facility. The other interest expense represents dividends on mandatorily redeemable preferred stock.

 

     Debt     Other
interest
expense
   

Total year

ended

December 31,

2005

 

Pro forma interest expense

   $ 49,396     $ —       $ 49,396  

Less: historical interest expense

     (38,181 )     (16,319 )     (54,500 )
                        

Net adjustment to interest expense

   $ 11,215     $ (16,319 )   $ (5,104 )
                        

The pro forma interest expense for the three months ended March 31, 2006 is calculated using the following assumed interest rates: (1) average LIBOR (4.71%) plus 2.25% for the first lien term loan, (2) average LIBOR (4.54%) plus 1.25% for the second lien term loan and (3) average Alternate Base Rate, as defined in the agreement entered into in connection with the first new credit facility, which was 7.4%, plus 1.0% for the revolving credit facility. The other interest expense represents dividends on mandatorily redeemable preferred stock.

 

     Debt     Other
interest
expense
   

Total

three months
ended

March 31,

2006

 

Pro forma interest expense

   $ 12,921     $ —       $ 12,921  

Less: historical interest expense

     (8,991 )     (1,472 )     (10,463 )
                        

Net adjustment to interest expense

   $ 3,930     $ (1,472 )   $ 2,458  
                        

 

  (4) Represents the elimination of the fair value gain recognized on an ineffective interest rate swap resulting from the redesignation of the derivative as effective in connection with the 2006 Financing.

 

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Table of Contents

GATEHOUSE MEDIA, INC.

Notes and Management’s Assumptions to Unaudited

Pro Forma Condensed Consolidated Financial Statements—(Continued)

(In thousands)

 

  (5) Reflects the net adjustment to deferred financing costs as follows:

 

     Amortization     Write off    

Total

year ended
December 31,
2005

 

Pro forma deferred financing costs

   $ 762     $ —       $ 762  

Less historical costs

     (1,247 )     (2,025 )     (3,272 )
                        

Net adjustment

   $ (485 )   $ (2,025 )   $ (2,510 )
                        
      
                

Amortization for

three months

ended March 31,

2006

 

Pro forma deferred financing cost

       $ 190  

Less historical costs

         (167 )
            

Net adjustment

       $ 23  
            

 

  (6) Reflects the elimination of certain expenses related to liabilities included in the historical statement of operations of Enterprise but not assumed by the Company.

 

  (7) The pro forma adjustment reflects the income tax effect of pro forma adjustments.

(E) Offering Adjustments

The following represents adjustments to reflect the effect of proceeds from our Offering on our historical operations:

Interest expense:

Reflects a net reduction in interest expense (debt) from our Offering-related transaction.

 

     Amount   

Effective

rate

   Year ended
December 31, 2005
   Three months ended
March 31, 2006

First Lien Term Loan

         $                        $                    

First Lien Revolving Loan

           

Second Lien Term Loan

           
               

Total

         $    $
               

 

 

 

F-12


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

GateHouse Media, Inc.:

We have audited the accompanying consolidated balance sheets of GateHouse Media, Inc. (formerly Liberty Group Publishing, Inc.) and subsidiaries (the Company) as of December 31, 2004 (Predecessor) and 2005 (Successor), and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years ended December 31, 2003 and 2004 (Predecessor Periods), the period from January 1, 2005 to June 5, 2005 (Predecessor Period), and the period from June 6, 2005 to December 31, 2005 (Successor Period). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GateHouse Media, Inc. (formerly Liberty Group Publishing, Inc.) and subsidiaries as of December 31, 2004 (Predecessor) and 2005 (Successor), and the results of their operations and their cash flows for the years ended December 31, 2003 and 2004 (Predecessor Periods), the period from January 1, 2005 to June 5, 2005 (Predecessor Period), and the period from June 6, 2005 to December 31, 2005 (Successor Period) in conformity with U.S. generally accepted accounting principles.

As discussed in note 1(f) to the consolidated financial statements, the Company changed to June 30 the date on which the annual impairment assessment of goodwill and mastheads is made.

As discussed in note 1(b) to the consolidated financial statements, effective June 6, 2005, FIF III Liberty Holdings LLC acquired all of the outstanding stock of GateHouse Media, Inc. in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the period after the acquisition is presented on a different cost basis than for the periods prior to the acquisition and therefore, is not comparable.

/s/ KPMG LLP

Chicago, Illinois

July 20, 2006

 

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Table of Contents

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2004 and 2005

(In thousands, except share data)

 

     2004     2005  
     (Predecessor)     (Successor)  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 3,276     $ 3,063  

Accounts receivable, net of allowance for doubtful accounts of $1,547 and $1,509 at December 31, 2004 and 2005, respectively

     22,067       22,587  

Inventory

     2,978       3,421  

Prepaid expenses

     1,374       1,392  

Deferred income taxes

     1,527       2,121  

Other current assets

     474       366  
                

Total current assets

     31,696       32,950  

Property, plant, and equipment, net

     44,933       60,017  

Goodwill

     183,438       316,691  

Intangible assets, net

     223,625       217,104  

Deferred financing costs, net

     4,051       753  

Other assets

     433       11,211  
                

Total assets

   $ 488,176     $ 638,726  
                
Liabilities and Stockholders’ Equity (Deficit)     

Current liabilities:

    

Current portion of Term Loan B

   $ 22,718     $ 3,071  

Current portion of long-term liabilities

     249       224  

Accounts payable

     1,451       1,616  

Accrued expenses

     15,778       10,505  

Deferred revenue

     8,742       8,851  
                

Total current liabilities

     48,938       24,267  

Long-term liabilities:

    

Borrowings under revolving credit facility

     —         8,500  

Term Loan B, less current portion

     37,339       301,355  

Long-term liabilities, less current portion

     620       505  

Senior subordinated notes

     180,000       —    

Senior discount debentures, redemption value $89,000

     89,000       —    

Senior debentures held by affiliates

     12,782       —    

Accrued interest on senior discount debentures and senior debentures held by affiliates

     3,971       —    

Deferred income taxes

     25,779       72,043  

Series A 14 3/4% Senior Redeemable Exchangeable Cumulative Preferred Stock, $0.01 par value, 21,000,000 shares authorized, 4,790,920 shares issued and outstanding at December 31, 2004. Aggregate involuntary liquidation preference, $25 per share plus accrued dividends.

     122,717       —    

Series B 10% Junior Redeemable Cumulative Preferred Stock, $0.01 par value, 250,000 shares authorized, 130,433 shares issued and outstanding at December 31, 2004. Aggregate involuntary liquidation preference, $1,000 per share plus accrued dividends.

     132,607       —    
                

Total liabilities

     653,753       406,670  
                

Stockholders’ equity (deficit):

    

Preferred stock, $0.01 par value, 21,250,000 shares authorized, none issued and outstanding at December 31, 2005 (Successor)

     —         —    

Common stock, $0.01 par value, 2,655,000 shares authorized, 2,185,177 and 226,400 shares issued, and 2,158,833 and 226,400 outstanding at December 31, 2004 and December 31, 2005, respectively

     22       2  

Additional paid-in capital

     16,444       226,398  

Deferred compensation

     —         (3,909 )

Notes receivable

     (953 )     —    

Retained earnings (accumulated deficit)

     (180,909 )     9,565  

Treasury stock, at cost, 26,344 shares at December 31, 2004 (Predecessor)

     (181 )     —    
                

Total stockholders’ equity (deficit)

     (165,577 )     232,056  
                

Total liabilities and stockholders’ equity (deficit)

   $ 488,176     $ 638,726  
                

See accompanying notes to consolidated financial statements.

 

F-14


Table of Contents

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the years ended December 31, 2003 and 2004 (Predecessor Periods), period from January 1, 2005 to June 5, 2005 (Predecessor Period), and the period from

June 6, 2005 to December 31, 2005 (Successor Period)

(In thousands, except per share data)

 

    Year ended December 31,    

Period from

January 1, 2005

to June 5, 2005

   

Period from

June 6, 2005 to

December 31,

2005

 
    2003     2004      
    (Predecessor)     (Predecessor)     (Predecessor)     (Successor)  

Revenues:

       

Advertising

  $ 139,258     $ 148,291     $ 63,172     $ 88,798  

Circulation

    31,478       34,017       14,184       19,298  

Commercial printing and other

    11,645       17,776       8,134       11,415  
                               

Total revenues

    182,381       200,084       85,490       119,511  

Operating costs and expenses:

       

Operating costs

    86,484       97,198       40,007       61,001  

Selling, general, and administrative

    52,230       53,703       26,978       30,035  

Depreciation and amortization

    13,359       13,374       5,776       8,030  

Transaction costs related to Merger

    —         —         7,703       2,850  

Impairment of long-term assets

    —         1,500       —         —    

Gain (loss) on sale of assets

    (104 )     (30 )     —         40  
                               

Income from operations

    30,204       34,279       5,026       17,635  

Interest expense—debt

    32,433       32,917       13,232       11,760  

Interest expense—dividends on mandatorily redeemable preferred stock

    13,206       29,019       13,484       —    

Amortization of deferred financing costs

    1,810       1,826       643       67  

Loss on early extinguishment of debt

    —         —         5,525       —    

Unrealized gain on derivative instrument

    —         —         —         (10,807 )

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  

Income tax expense (benefit)

    (4,691 )     1,228       (3,027 )     7,050  
                               

Income (loss) from continuing operations

    (14,650 )     (30,711 )     (24,831 )     9,565  

Income from discontinued operations, net of income taxes of $303 and $3,091 in 2003 and 2004, respectively

    486       4,626       —         —    
                               

Net income (loss)

    (14,164 )     (26,085 )     (24,831 )     9,565  

Dividends on mandatorily redeemable preferred stock

    (12,409 )     —         —         —    
                               

Net income (loss) available to common stockholders

  $ (26,573 )   $ (26,085 )   $ (24,831 )   $ 9,565  
                               

Earnings (loss) per share:

       

Basic and diluted:

       

Income (loss) from continuing operations available to common stockholders

  $ (12.53 )   $ (14.23 )   $ (11.50 )   $ 42.25  

Net income (loss) available to common stockholders

  $ (12.31 )   $ (12.08 )   $ (11.50 )   $ 42.25  

See accompanying notes to consolidated financial statements.

 

F-15


Table of Contents

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Deficit)

For the years ended December 31, 2003 and 2004 (Predecessor Periods), period from

January 1, 2005 to June 5, 2005 (Predecessor Period), and the period from

June 6, 2005 to December 31, 2005 (Successor Period)

(In thousands, except share data)

 

    Common stock    

Additional

paid-in

capital

   

Deferred

compensation

    Treasury stock    

Notes

receivable

   

Retained

earnings

(accumulated

deficit)

    Total  
    Shares     Amount         Shares     Amount        

Balance at December 31, 2002 (Predecessor)

  2,185,177     $ 22     $ 16,444     $ —       26,344     $ (181 )   $ (970 )   $ (128,251 )   $ (112,936 )

Dividends on senior preferred stock

  —         —         —         —       —         —         —         (6,899 )     (6,899 )

Dividends on junior preferred stock

  —         —         —         —       —         —         —         (5,510 )     (5,510 )

Net loss

  —         —         —         —       —         —         —         (14,164 )     (14,164 )

Repayment of notes receivable through forgiveness of debt

  —         —         —         —       —         —         17       —         17  
                                                                   

Balance at December 31, 2003 (Predecessor)

  2,185,177       22       16,444       —       26,344       (181 )     (953 )     (154,824 )     (139,492 )

Net loss

  —         —         —         —       —         —         —         (26,085 )     (26,085 )
                                                                   

Balance at December 31, 2004 (Predecessor)

  2,185,177       22       16,444       —       26,344       (181 )     (953 )     (180,909 )     (165,577 )

Repayment of notes receivable through forgiveness of debt

  —         —         —         —       —         —         953       —         953  

Net loss

  —         —         —         —       —         —         —         (24,831 )     (24,831 )
                                                                   

Balance at June 5, 2005 (Predecessor)

  2,185,177       22       16,444       —       26,344       (181 )     —         (205,740 )     (189,455 )

Redemption of Predecessor’s outstanding common stock

  (2,185,177 )     (22 )     (16,444 )     —       —         —         —         —         (16,466 )

Cancellation of Predecessor’s stock held in treasury

  —         —         —         —       (26,344 )     181       —         —         181  

Write-off of Predecessor’s accumulated deficit associated with the Merger

  —         —         —         —       —         —         —         205,740       205,740  

Contributed capital associated with the Merger

  221,975       2       221,973       —       —         —         —         —         221,975  

Restricted share grants

  4,425       —         4,425       (4,425 )   —         —         —         —         —    

Restricted share grants, compensation expense

  —         —         —         516     —         —         —         —         516  

Net income

  —         —         —         —       —         —         —         9,565       9,565  
                                                                   

Balance at December 31, 2005 (Successor)

  226,400     $ 2     $ 226,398     $ (3,909 )   —       $ —       $ —       $ 9,565     $ 232,056  
                                                                   

See accompanying notes to consolidated financial statements.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the years ended December 31, 2003 and 2004 (Predecessor Periods), period from January 1, 2005 to June 5, 2005 (Predecessor Period), and the period from

June 6, 2005 to December 31, 2005 (Successor Period)

(In thousands)

 

    Year ended December 31,    

Period from

January 1, 2005
to June 5,

2005

   

Period from

June 6, 2005
to December 31,

2005

 
    2003     2004      
    (Predecessor)     (Predecessor)     (Predecessor)     (Successor)  

Cash flows from operating activities:

       

Net income (loss)

  $ (14,164 )   $ (26,085 )   $ (24,831 )   $ 9,565  

Income from discontinued operations, net of income taxes

    (486 )     (4,626 )     —         —    
                               

Net income (loss) from continuing operations

    (14,650 )     (30,711 )     (24,831 )     9,565  

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) continuing operating activities:

       

Depreciation and amortization

    13,359       13,374       5,776       8,030  

Amortization of deferred financing costs

    1,810       1,826       643       67  

Accretion of senior discount debentures

    840       —         —         —    

Issuance of senior debentures in lieu of paying cash interest on senior discount debentures and senior debentures held by affiliates

    4,022       8,760       4,765       —    

Change in accrued interest on senior discount debentures and senior debentures held by affiliates

    3,547       424       (389 )     —    

Noncash compensation

    17       —         —         516  

Deferred taxes

    (5,182 )     457       (3,520 )     6,899  

Write-off of deferred financing costs

    161       —         —         —    

Write-off of deferred offering costs

    1,935       —         —         —    

(Gain) loss on sale of assets

    104       30       —         (40 )

Noncash transaction costs related to Merger

    —         —         953       —    

Unrealized gain on derivative instrument

    —         —         —         (10,807 )

Loss on early extinguishment of debt

    —         —         5,525       —    

Impairment of long-term assets

    —         1,500       —         —    

Interest expense—dividends on mandatorily redeemable preferred stock

    13,206       29,019       13,484       —    

Changes in assets and liabilities, net of acquisitions and dispositions:

       

Accounts receivable, net

    76       (1,440 )     (656 )     760  

Inventory

    69       (88 )     74       (408 )

Prepaid expenses and other assets

    441       (566 )     (226 )     346  

Accounts payable

    540       (323 )     223       (58 )

Accrued expenses

    1,607       (153 )     (2,227 )     (5,304 )

Deferred offering costs

    (1,153 )     —         —         —    

Other long-term liabilities

    (376 )     (403 )     (95 )     (138 )

Deferred revenue

    (90 )     (259 )     (71 )     (113 )
                               

Net cash provided by (used in) continuing operating activities

    20,283       21,447       (572 )     9,315  
                               

Cash flows from continuing investing activities:

       

Acquisition of GateHouse Media, Inc., net of cash acquired

    —         —         —         (23,930 )

Purchases of property, plant, and equipment

    (2,141 )     (3,654 )     (1,015 )     (4,967 )

Proceeds from exchange of publications and sale of other assets

    995       1,994       —         3,398  

Payments made for acquisitions, net of cash acquired

    (2,481 )     (968 )     (80 )     (15,082 )
                               

Net cash used in continuing investing activities

    (3,627 )     (2,628 )     (1,095 )     (40,581 )
                               

Cash flows from continuing financing activities:

       

Extinguishment of senior subordinated notes, net of fees

    —         —         (182,813 )     —    

Extinguishment of senior discount notes, held by third parties

    —         —         (20,184 )     —    

Extinguishment of senior preferred stock, held by third parties

    —         —         (11,361 )     —    

Repayments of Term Loan B

    (743 )     (11,700 )     (60,052 )     —    

Payment of debt issuance costs

    —         —         (2,350 )     (771 )

Contributed capital

    —         —         —         221,975  

Extinguishment of preferred stock related to merger

    —         —         —         (134,321 )

Net borrowings (repayments) under new credit facility, including fees

    —         —         —         8,500  

Net borrowings under new term loan

    —         —         276,500       27,926  

Extinguishment of senior debentures

    —         —         —         (90,329 )

Net repayments under revolving credit facility

    (15,507 )     (6,338 )     —         —    
                               

Net cash provided by (used in) continuing financing activities

    (16,250 )     (18,038 )     (260 )     32,980  
                               

Net cash provided by (used in) discontinued operations:

       

Operating cash flows

    42       459       —         —    

Investing cash flows

    (108 )     —         —         —    
                               

Net increase (decrease) in cash and cash equivalents

    340       1,240       (1,927 )     1,714  

Cash and cash equivalents, at beginning of period

    1,696       2,036       3,276       1,349  
                               

Cash and cash equivalents, at end of period

  $ 2,036     $ 3,276     $ 1,349     $ 3,063  
                               

Supplemental disclosures of cash flow information:

       

Cash interest paid

  $ 22,754     $ 24,210     $ 16,879     $ 10,591  

Cash paid for income taxes

    408       619       459       269  

Repayment of notes receivable through forgiveness of debt

    17       —         953       —    

Issuance of senior debentures in lieu of paying cash interest on senior discount debentures and senior debentures held by affiliates

    4,022       8,760       4,765       —    

See accompanying notes to consolidated financial statements.

 

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Table of Contents

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(In thousands, except share data)

(1) Description of Business, Basis of Presentation and Summary of Significant Accounting Policies

(a) Description of Business

GateHouse Media, Inc. (GateHouse), formerly Liberty Group Publishing, Inc. (LGP), and subsidiaries is a leading U.S. publisher of local newspapers and related publications that are the dominant source of local news and print advertising in their markets. As of December 31, 2005, the Company (as defined below) owns and operates 292 publications located in 16 states. The majority of the Company’s paid daily newspapers have been published for more than 100 years and are typically the only paid daily newspapers of general circulation in their respective nonmetropolitan markets. The Company’s publications generally face limited competition as a result of operating in small and midsized markets that can typically support only one newspaper. The Company has strategically clustered its publications in geographically diverse, nonmetropolitan markets in the Midwest and Northeast United States and in the Chicago suburban market, which limits its exposure to economic conditions in any single market or region.

Unlike large metropolitan newspapers, the Company derives a majority of its revenues from local advertising, rather than national advertising, which is generally more sensitive to economic conditions. The Company currently operates in a single business segment as its publications have similar economic characteristics, products, customers and distribution.

(b) Basis of Presentation

GateHouse was formed in 1997 for purposes of acquiring 166 daily and weekly newspapers, which is further described in note 8. GateHouse is a holding company for its wholly owned subsidiary, GateHouse Media Operating, Inc. (Operating Company). The consolidated financial statements include the accounts of GateHouse and Operating Company and its consolidated subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated.

On May 9, 2005, an affiliate of Fortress Investment Group LLC, FIF III Liberty Holdings LLC (Parent), FIF III Liberty Acquisitions, LLC, a wholly owned subsidiary of Parent (Merger Subsidiary) and the Company entered into an agreement that provided for the merger of Merger Subsidiary with and into the Company, with the Company continuing as a wholly owned subsidiary of Parent (the Merger). The Merger was completed on June 6, 2005. The total value of the transaction was approximately $527,000.

The Merger resulted in a new basis of accounting under Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. This change creates many differences between reporting for the Company pre-Merger, as predecessor, and the Company post-Merger, as successor. The accompanying consolidated financial statements and the notes to consolidated financial statements reflect separate reporting periods for the predecessor and successor company.

The following transactions occurred in connection with the Merger:

 

  Ÿ   The Company’s issued and outstanding shares of common stock, par value $0.01, were converted into the right to receive $10.00 per share in cash (Conversion Amount), or $21,588 in the aggregate.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

  Ÿ   Each share of Series B-1 Senior Preferred stock issued and outstanding at the time of the Merger was converted, without interest, into $1,000 per share, or $115,821 in the aggregate, plus accumulated and unpaid dividends of $3,182, and was extinguished.

 

  Ÿ   Each share of Series B Junior Preferred Stock issued and outstanding at the time of the Merger was converted, without interest, into $115.56 per share, or $15,318 in the aggregate, plus accumulated and unpaid dividends of $0, and was extinguished.

 

  Ÿ   Parent and certain management investors contributed approximately $221,975 in cash to the Company, which in turn held all the outstanding shares of common stock of the Company after the completion of the Merger.

 

  Ÿ   The Company amended its New Credit Facility to allow for a change in control and borrowed $33,500 on the revolving credit facility in connection with the Merger. The Company paid $771 in fees in connection with the amendment.

 

  Ÿ   The Company incurred approximately $10,553 in transaction costs associated with the Merger.

 

  Ÿ   Each outstanding option under the Company’s 1999 Stock Option Plan was cancelled for cash consideration per share equal to the difference between the conversion amount of $10.00 per share and the respective exercise price of the option, or $93 in the aggregate. Additionally, all outstanding shares of the Company’s common stock held in treasury at the time of the Merger were cancelled.

(c) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(d) Inventory

Inventory consists principally of newsprint, which is valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method.

(e) Property, Plant, and Equipment

Property, plant, and equipment is recorded at cost. Routine maintenance and repairs are expensed as incurred.

Depreciation is calculated under the straight-line method over the estimated useful lives, principally 25 years for buildings and improvements and 3 to 10 years for machinery, equipment, furniture, fixtures, and computer software. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset.

(f) Goodwill and Intangible Assets

Intangible assets consist of advertiser, subscriber, customer relationships, mastheads, and noncompete agreements with former owners of acquired newspapers. The excess of acquisition costs over the estimated fair value of tangible and identifiable intangible net assets acquired is recorded as goodwill.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

Advertiser and subscriber relationships were amortized over useful lives of 30 and 20 years, respectively, for the years ended December 31, 2003 and 2004 and during the period from January 1, 2005 to June 5, 2005. Customer relationships unrelated to newspapers were amortized over 10 years for the years ended December 31, 2003 and 2004 and during the period from January 1, 2005 to June 5, 2005. Noncompete agreements were amortized over periods of up to 10 years depending on the specifics of the agreement.

Advertiser and subscriber relationships are being amortized over useful lives of 18 and 19 years, respectively, commencing June 6, 2005. Customer relationships unrelated to newspapers are being amortized over 15 years commencing June 6, 2005. Noncompete agreements are amortized over periods of up to 5 years depending on the specifics of the agreement.

Goodwill and mastheads are not amortized pursuant to Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Mastheads are not amortized because it has been determined that the useful lives of such mastheads are indefinite.

Through December 31, 2004, the Company assessed impairment of goodwill and mastheads annually on December 31. As a result of the Merger, the Company has changed to June 30 the date on which the annual impairment assessment is made.

The Company assesses impairment of goodwill and mastheads by using multiples of recent and projected revenues and EBITDA (earnings before interest, taxes, depreciation, and amortization) for individual or strategic regional clusters of properties to determine the fair value of the properties and then deducts the fair value of assets other than goodwill and mastheads to arrive at the fair value of the 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 the Company will consider whether a temporary or permanent impairment has occurred based on the specific facts and circumstances associated with the individual, or strategic regional cluster of properties. The multiples of revenue and EBITDA used to determine fair value are based on the Company’s experience in acquiring and selling properties and multiples reflected in the purchase prices of recent sales transactions of newspaper properties similar to those it owns.

The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company assesses the recoverability of its 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 future operating losses, significant changes in the manner of use of the acquired assets or the strategy for the Company’s 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. The Company records 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 the consolidated statements of operations if such a difference arises.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

(g) Revenue Recognition

Circulation revenue, which is billed to customers at the beginning of the subscription period, is recognized on a straight-line basis over the term of the related subscription. Advertising revenue is recognized upon publication of the advertisement. Revenue for commercial printing is recognized upon delivery.

(h) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(i) Fair Value of Financial Instruments

The Company has reviewed its cash equivalents, accounts receivable, accounts payable, and accrued expenses and has determined that their carrying values approximate fair value due to the short maturity of these instruments. The Company’s carrying value for its Term Loan B and borrowings under the revolving credit facility approximates fair value due to the variable interest rates associated with these financial instruments.

The Company applies SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically, SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders’ equity or net earnings depending on whether the derivative instrument qualifies as an effective hedge for accounting purposes and, if so, the nature of the hedging activity.

To qualify for hedge accounting, the Company requires that the instruments are effective in reducing the risk exposure that they are designated to hedge. Instruments that meet established accounting criteria are formally designated as hedges at the inception of the contract. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in the fair value of the underlying exposure both at the inception of the hedging relationship and on an ongoing basis. The Company’s policy requires the assessment for effectiveness to be formally documented at hedge inception and reviewed at least quarterly throughout the designated hedge period.

(j) Cash Equivalents

Cash equivalents represent highly liquid certificates of deposit with a maximum term at origination of three months or less.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

(k) Deferred Financing Costs

Deferred financing costs consist of costs incurred in connection with debt financings. Such costs are amortized to interest expense on a straight-line basis over the remaining terms of the related debt.

(l) Advertising

Advertising costs are expensed in the period incurred. The Company incurred total advertising expenses of $816, $844, $585 and $382 during the years ended December 31, 2003 and 2004, the period from January 1, 2005 to June 5, 2005, and the period from June 6, 2005 to December 31, 2005, respectively.

(m) Earnings (loss) per share

Basic earnings (loss) per share is computed as net income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issued through common stock equivalents.

(n) Stock-based Employee Compensation

On June 6, 2005, the Company issued 4,425 Restricted Share Grants (RSGs) to certain management investors pursuant to each investor’s management stockholder agreement. Each RSG is convertible into one share of common stock. Under the Plan, the RSGs vest by one-third (1/3) on each of the third, fourth and fifth anniversaries from the grant date. In the event the management investor is terminated without cause, the RSGs immediately vest at the percentage that would have vested under the normal vesting period on the next succeeding anniversary date following such termination. In the event the management investor’s employment is terminated without cause within twelve months after a change in control, all unvested RSGs become immediately vested at the termination date. The Company recognized $516 in employee compensation expense related to the RSGs during the period ending December 31, 2005. During the period prior to the lapse and removal of the vesting restrictions, the management investor will have all of the rights of a stockholder, including without limitation, the right to vote and the right to receive all dividends or other distributions. As a result, the RSGs have been reflected as outstanding common stock. At December 31, 2005, there were 4,425 RSGs issued and outstanding with a weighted average grant date fair value of $1,000.

Prior to the Merger, the Company had one stock-based employee compensation plan, which is more fully described in note 15. On June 5, 2005, each outstanding option under the plan was cancelled for cash consideration per share equal to the difference between the conversion amount of $10.00 per share and the respective exercise price of the option, or $93 in the aggregate, and the Company recognized compensation expense accordingly. The Company accounts for its stock options under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to apply the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and provide pro forma net income (loss) disclosures for employee stock option grants made as if the fair value based method defined in SFAS No. 123 had been applied. Under APB Opinion No. 25, compensation expense would be recorded on the date of the grant only if the current market price of the underlying stock exceeded the

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

exercise price. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. The following table illustrates the effect on net income (loss) as if the Company had applied the fair value based method to all outstanding and unvested awards in each period:

 

     Year ended December 31,    

Period from

January 1,

2005 to

June 5,

2005

   

Period from

June 6,

2005 to

December 31,

2005

 
     2003     2004      
     (Predecessor)     (Predecessor)     (Predecessor)     (Successor)  

Net income (loss), as reported

   $ (14,164 )   $ (26,085 )   $ (24,831 )   $ 9,565  

Add:

        

Stock-based employee compensation expense included in reported net income (loss)

     —         —         93       516  

Deduct:

        

Stock-based employee compensation expense determined under fair value-based method

     (8 )     (23 )     (93 )     (516 )
                                

Pro forma net income (loss)

   $ (14,172 )   $ (26,108 )   $ (24,831 )   $ 9,565  
                                

Earnings (loss) per share:

        

Basic—as reported

   $ (12.31 )   $ (12.08 )   $ (11.50 )   $ 42.25  

Basic—pro forma

   $ (12.31 )   $ (12.09 )   $ (11.50 )   $ 42.25  

Diluted—as reported

   $ (12.31 )   $ (12.08 )   $ (11.50 )   $ 42.25  

Diluted—pro forma

   $ (12.31 )   $ (12.09 )   $ (11.50 )   $ 42.25  

Under the stock-based employee compensation plan, the exercise price of each option equals the fair value of the common stock on the date of grant. For purposes of calculating compensation expense consistent with SFAS No. 123, the fair value of each 2004 stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0%, expected volatility of 18.6%, risk-free interest rate of 4.5%, and an expected life of 10 years. There were no stock option grants during 2005 and 2003.

(o) Reclassifications

Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the 2005 successor presentation.

(p) 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

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

vesting period. SFAS No. 123R was to be effective as of the first interim or annual reporting period that began after June 15, 2005. On April 14, 2005, the compliance date was changed by the Securities and Exchange Commission (SEC) such that SFAS No. 123R is effective at the start of the next fiscal period beginning after June 15, 2005, which is January 1, 2006 for the Company. The Company will adopt SFAS No. 123R on January 1, 2006 and does not expect the adoption to have a material impact on the consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB 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 correction 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 the Company’s consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 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 and the Company adopted this interpretation for the nine month period ended April 2, 2006. Adopting FIN No. 47 did not have a material impact in the Company’s financial position, results of operations, or cash flows.

(2) Acquisitions

(a) Midland Communications—2003

During December 2003, the Company entered into an agreement with Midland Communications to acquire a printing facility. The purchase price was $2,471. The Company has accounted for the acquisition using the purchase method of accounting. Accordingly, the cost has been allocated to the assets acquired and liabilities assumed based upon their respective fair values. The purchase price allocation for the Midland Communications acquisition is as follows:

 

Cash

   $ 2,471

Legal and professional fees and other costs

     132
      

Total purchase price

   $ 2,603
      

Tangible net assets acquired

   $ 1,266

Customer relationship intangible assets

     1,337
      

Total purchase price allocation

   $ 2,603
      

The customer relationship intangible assets acquired were being amortized through June 5, 2005 (predecessor) over 10 years. The operating results of the printing facility are included in the consolidated financial statements since the date of acquisition.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

(b) Lee Exchange—2004

On February 3, 2004, the Company acquired the daily newspapers in Corning, New York and Freeport, Illinois from Lee Enterprises, Inc. in exchange for the Company’s daily newspapers in Elko, Nevada and Burley, Idaho, as well as its weeklies in Haily, Idaho and Jerome, Idaho (the Lee Exchange). In conjunction with the Lee Exchange, the Company received cash proceeds of $1,994. The fair value of the newspaper businesses acquired in the Lee Exchange, collectively resulted in a pre-tax gain of $7,716, or a gain of $4,625, net of the tax effect of $3,091. The Company has accounted for the acquired newspaper businesses using the purchase method of accounting. Accordingly, the fair value of the newspaper businesses acquired was allocated to the assets acquired and liabilities assumed based on their respective fair values. Advertiser and subscriber relationships were being amortized through June 5, 2005 (predecessor) over remaining useful lives of 30 and 20 years, respectively. Mastheads were not amortized because their useful lives were determined to be indefinite.

The operating results of the acquired newspaper businesses from the Lee Exchange have been included in the consolidated financial statements since the exchange date. The operating results of the newspaper businesses disposed of in the Lee Exchange have been accounted for as a discontinued operation and, accordingly, such amounts have been reclassified to reflect the disposition as a discontinued operation for all periods presented. Income from discontinued operations for the year ended December 31, 2004 includes operating income of $1 and a gain on the exchange of $4,625, net of tax. Income from discontinued operations for the year ended December 31, 2003 relates solely to the operating results of the disposed-of newspaper businesses.

A computation of the gain on the exchange is as follows:

 

Fair value of newspaper businesses acquired

   $ 24,579  

Cash consideration received from Lee

     1,994  
        
     26,573  

Net book value of newspaper businesses disposed

     (18,119 )

Other liabilities

     (270 )

Legal and professional fees

     (468 )
        

Gain on exchange before income taxes

     7,716  

Income tax expense

     3,091  
        

Gain on exchange, net of income taxes

   $ 4,625  
        

The fair value allocation for the newspaper businesses acquired in 2004 is as follows:

 

Fair value of newspaper businesses acquired

   $ 24,579  
        

Current assets

   $ 869  

Property, plant, and equipment

     3,300  

Advertiser relationships

     7,947  

Subscriber relationships

     2,588  

Mastheads

     3,004  

Goodwill

     7,791  

Current liabilities

     (920 )
        
   $ 24,579  
        

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

(c) Fortress Acquisition—2005

On May 9, 2005, an affiliate of Fortress Investment Group LLC, FIF III Liberty Holdings LLC (Parent), FIF III Liberty Acquisitions, LLC, a wholly owned subsidiary of Parent (Merger Subsidiary) and the Company entered into an agreement that provided for the merger of Merger Subsidiary with and into the Company, with the Company continuing as a wholly owned subsidiary of Parent (the Merger). The Merger was completed on June 6, 2005. The total value of the transaction was approximately $527,000.

In connection with the Merger, the Company’s issued and outstanding shares of the its common stock, par value $0.01, were converted into the right to receive $10.00 per share in cash (Conversion Amount), or $21,588 in the aggregate. Additionally, each share of Series B-1 Senior Preferred stock issued and outstanding at the time of the Merger was converted, without interest, into $1,000 per share, or $115,821 in the aggregate, plus accumulated and unpaid dividends of $3,182. Each share of Series B Junior Preferred Stock issued and outstanding at the time of the Merger was converted, without interest, into $115.56 per share, or $15,317 in aggregate, plus accumulated and unpaid dividends of $0. Parent and certain management investors contributed approximately $221,975 in cash to the Company, which in turn held all the outstanding shares of common stock of the Company after the completion of the Merger. The Company amended its New Credit Facility to allow for a change in control and borrowed $33,500 on the revolving credit facility in connection with the Merger. The predecessor Company incurred approximately $7,703 in transaction costs associated with the Merger.

Each outstanding option under the Company’s 1999 Stock Option Plan was cancelled for cash consideration per share equal to the difference between the conversion amount of $10.00 per share and the respective exercise price of the option, or $93 in the aggregate. Additionally, all shares of the Company’s treasury stock outstanding were cancelled in conjunction with the Merger.

The unaudited pro forma condensed consolidated statements of operations information for 2004 and 2005, set forth below, presents the results of operations as if the Merger had occurred at the beginning of each year and is not necessarily indicative of future results or actual results that would have been achieved had the Merger occurred as of the beginning of such year. Other acquisitions described in (a) and (b), above, and (d), below, are excluded.

 

         2004             2005      
     (unaudited)  

Revenues

   $ 200,084     $ 205,001  

Loss from continuing operations

     (40,844 )     (28,242 )

Net loss

     (36,218 )     (28,242 )

Loss from continuing operations per common share:

    

Basic and diluted

   $ (180.41 )   $ (124.75 )

Loss per common share:

    

Basic and diluted

   $ (159.98 )   $ (124.75 )

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

The aggregate purchase price paid in the Merger transaction of $526,841 consisted of the following:

 

Payment of common stock

   $ 21,588

Assumption of Term Loan B

     276,500

Assumption of preferred stock

     134,321

Assumption of senior debentures

     90,329

Payment of fees and expenses

     1,759

Payment of working capital settlement

     2,344
      
   $ 526,841
      

The Merger was recorded in accordance with SFAS No. 141, Business Combinations. The Company continues to refine the fair value estimates in accordance with SFAS No. 141. As additional information becomes available and as actual values vary from these estimates, the underlying assets may need to be adjusted, thereby impacting intangible asset estimates, as well as goodwill. The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date:

 

Current assets

   $ 249,309

Other assets

     364

Property, plant and equipment

     58,022

Advertising relationships

     125,356

Customer relationships

     2,308

Subscriber relationships

     29,047

Mastheads

     58,402

Goodwill

     316,412
      

Total assets

     839,220

Current liabilities

     28,282

New Term Loan B

     276,500

Senior debentures

     90,329

Senior preferred stock

     119,003

Junior preferred stock

     15,318

Other long-term liabilities

     488

Deferred income taxes

     87,325
      

Total liabilities

     617,245
      

Net assets acquired

   $ 221,975
      

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

(d) Other Acquisitions—2005

During the period from June 6, 2005 to December 31, 2005, the Company acquired 18 publications in 5 separate transactions for an aggregate purchase price of $15,381. The purchase price allocation for these acquisitions is as follows:

 

Net tangible assets acquired

   $ 307

Property, plant, and equipment

     3,265

Non compete assets

     221

Advertising relationships

     4,035

Subscriber relationships

     899

Mastheads

     1,947

Goodwill

     4,707
      

Purchase price

   $ 15,381
      

The Company continues to refine the fair value estimates in accordance with SFAS No. 141. As additional information becomes available and as actual values vary from these estimates, the underlying assets may need to be adjusted, thereby impacting intangible asset estimates, as well as goodwill.

(3) Property, Plant, and Equipment

Property, plant, and equipment consisted of the following:

 

     As of December 31,  
     2004     2005  
     (Predecessor)     (Successor)  

Land

   $ 7,797     $ 9,140  

Building and improvements

     25,700       28,590  

Machinery and equipment

     34,046       23,213  

Furniture, fixtures, and computer software

     4,105       1,952  
                
     71,648       62,895  

Less accumulated depreciation and amortization

     (26,715 )     (2,878 )
                

Total

   $ 44,933     $ 60,017  
                

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

(4) Goodwill and Intangible Assets

Goodwill and intangible assets consisted of the following:

 

     As of December 31, 2004 (Predecessor)
     Gross carrying
amount
   Accumulated
amortization
   Net carrying
amount

Amortized intangible assets:

        

Noncompete agreements

   $ 17,440    $ 16,996    $ 444

Advertiser relationships

     196,234      33,462      162,772

Customer relationships

     1,337      134      1,203

Subscriber relationships

     52,443      12,051      40,392
                    

Total

   $ 267,454    $ 62,643    $ 204,811
                    

Nonamortized intangible assets:

        

Goodwill

   $ 183,438      

Mastheads

     18,814      
            

Total

   $ 202,252      
            

 

     As of December 31, 2005 (Successor)
     Gross carrying
amount
  

Accumulated

amortization

   Net carrying
amount

Amortized intangible assets:

        

Noncompete agreements

   $ 221    $ 16    $ 205

Advertiser relationships

     129,391      4,105      125,286

Customer relationships

     2,308      90      2,218

Subscriber relationships

     29,945      900      29,045
                    

Total

   $ 161,865    $ 5,111    $ 156,754
                    

Nonamortized intangible assets:

        

Goodwill

   $ 316,691      

Mastheads

     60,350      
            

Total

   $ 377,041      
            

Amortization expense for the years ended December 31, 2003 and 2004, period from January 1, 2005 to June 5, 2005, and the period from June 6, 2005 to December 31, 2005 was $8,772, $8,636, $3,626 and $5,111, respectively. Estimated future amortization expense as of December 31, 2005, is as follows:

 

For the year ending December 31:

  

2006

   $ 8,963

2007

     8,963

2008

     8,963

2009

     8,963

2010

     8,946

Thereafter

     111,956
      

Total

   $ 156,754
      

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

The changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2004, period from January 1, 2005 to June 5, 2005, and the period from June 6, 2005 to December 31, 2005 are as follows:

 

As of January 1, 2003 (Predecessor)

   $ 185,447  

Goodwill from acquisitions

     20  
        

Balance as of December 31, 2003 (Predecessor)

     185,467  

Goodwill from acquisitions

     8,106  

Goodwill impairment

     (526 )

Goodwill disposed of in Lee Exchange

     (9,373 )

Other

     (236 )
        

Balance as of December 31, 2004 (Predecessor)

     183,438  

Goodwill from acquisitions

     23  
        

Balance at June 5, 2005 (Predecessor)

     183,461  

Goodwill adjustment from Merger

     132,951  

Goodwill from acquisitions

     4,707  

Adjustment related to income tax valuation allowance

     (4,428 )
        

Balance at December 31, 2005 (Successor)

   $ 316,691  
        

As of December 31, 2005, goodwill in the amount of $151,017 is deductible for income tax purposes.

The Company’s 2004 annual impairment test was conducted as of December 31, 2004 (see note 1(f)). As a result of this test, the Company determined that the fair values of two properties were less than the net book values of such properties on December 31, 2004 and a goodwill impairment loss of $526 was recorded in 2004. In addition, impairment losses of $200 and $774 related to net property, plant, and equipment and net intangible assets, respectively, were recorded in 2004. There were no impairments in 2003 or 2005.

(5) Accounts Receivable

Activity in the allowance for doubtful accounts is summarized as follows:

 

     Year ended December 31,    

Period from

January 1,

2005 to

June 5,

2005

   

Period from

June 6,

2005 to

December 31,

2005

 
     2003     2004      
     (Predecessor)     (Predecessor)     (Predecessor)     (Successor)  

Beginning balance

   $ 1,340     $ 1,600     $ 1,547     $ 1,437  

Balance acquired from acquisitions

     238       80       —         17  

Balance relieved from divestitures

     —         (33 )     —         —    

Bad debt expense

     1,295       919       411       1,232  

Write-offs

     (1,273 )     (1,019 )     (521 )     (1,177 )
                                

Ending Balance

   $ 1,600     $ 1,547     $ 1,437     $ 1,509  
                                

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

(6) Accrued Expenses

Accrued expenses consisted of the following:

 

     As of December 31,
     2004    2005
     (Predecessor)    (Successor)

Accrued payroll

   $ 2,541    $ 2,820

Accrued vacation

     98      88

Accrued bonus

     1,335      1,069

Accrued interest

     8,140      1,333

Accrued other

     3,664      5,195
             
   $ 15,778    $ 10,505
             

(7) Lease Commitments

The future minimum lease payments related to the Company’s noncancelable operating lease commitments as of December 31, 2005 are as follows:

 

For the year ending December 31:

  

2006

   $ 878

2007

     690

2008

     607

2009

     496

2010

     391
      

Total minimum lease payments

   $ 3,062
      

Rental expense under operating leases for the years ended December 31, 2003 and 2004, period from January 1, 2005 to June 5, 2005, and the period from June 6, 2005 to December 31, 2005 was $746, $766, $365, and $439, respectively.

(8) Senior Subordinated Notes, Senior Discount Debentures, and Senior Debentures

The Senior Subordinated Notes, Senior Discount Debentures, and Senior Debentures consisted of the following:

 

     As of December 31,
     2004    2005
     (Predecessor)    (Successor)

Operating Company:

     

9 3/8% Senior Subordinated Notes due February 1, 2008

   $ 180,000    $ —  

LGP:

     

11 5/8% Senior Discount Debentures, $89,000 redemption value due February 1, 2009

     89,000      —  

11 5/8% Senior Debentures due February 1, 2009

     12,782      —  
             

Total Senior Subordinated Notes, Senior Discount Debentures, and Senior Debentures

     281,782      —  

Less current installments

     —        —  
             

Total Senior Subordinated Notes, Senior Discount Debentures, and Senior Debentures excluding current installments

   $ 281,782    $ —  
             

 

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Table of Contents

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

The acquisition of 166 newspapers in January 1998 was financed in part by: (i) $180,000 from the issuance and sale by the Operating Company of $180,000 aggregate principal amount of 9 3/8% Senior Subordinated Notes (the Notes) due February 1, 2008 and (ii) $50,521 from the issuance and sale by GateHouse of $89,000 aggregate principal amount of 11 5/8% Senior Discount Debentures (the Senior Discount Debentures) due February 1, 2009.

The Notes were general unsecured obligations of the Operating Company, and were irrevocably and unconditionally jointly and severally guaranteed by each of the Operating Company’s existing and future subsidiaries. As of February 1, 2003, the Notes were redeemable for cash at the option of the Operating Company at stipulated redemption amounts. In the event of a change in control (as defined in the Notes) of the Operating Company or the Company, the Company was required to offer to repurchase the Notes at 101% of their principal amount.

The Senior Discount Debentures issued by GateHouse were general unsecured obligations. The Senior Discount Debentures accreted to a full principal amount of $89,000 as of February 1, 2003. Thereafter, cash interest on the Senior Discount Debentures accrued and was payable semi-annually on February 1 and August 1 of each year. As of February 1, 2003, the Senor Discount Debentures were redeemable for cash at the option of GateHouse at stipulated redemption amounts. In the event of a change in control of GateHouse, and subject to certain conditions, the holders of the Senior Discount Debentures had the right to require GateHouse to repurchase all of the Senior Discount Debentures at a price of 101% of the principal amount at maturity thereof, plus accrued and unpaid interest to the repurchase date.

On December 17, 2001, Green Equity Investors II, L.P (GEI II) and Green Equity Investors III, L.P. (GEI III) purchased Senior Discount Debentures with a face value of $11,819 and $57,381, respectively, on the open market at a substantial discount. GEI II and GEI III are affiliates of Leonard Green & Partners. At December 31, 2004, Leonard Green & Partners owned 1,946,605 and 13,153 shares of GateHouse’s common stock and Junior Preferred Stock, respectively. Leonard Green & Partners affiliates also owned a substantial portion of GateHouse’s Senior Preferred Stock. The purchase of Senior Discount Debentures by GEI II and GEI III resulted in a cancellation and reissuance of indebtedness for Federal income tax purposes.

On July 25, 2003, the Operating Company and GateHouse entered into an amendment to the Amended Credit Facility (see note 9). The amendment permitted GateHouse to issue debt in lieu of paying cash for the interest due on the Senior Discount Debentures, and to issue debt in lieu of paying cash interest due on the additional debt that was issued in lieu of paying cash interest on the Senior Discount Debentures.

On July 30, 2003, GateHouse entered into an agreement, effective August 1, 2003, with GEI II and GEI III, whereby GateHouse may, at its option, issue 11 5/8% senior debentures (the Senior Debentures) to GEI II and GEI III on each interest payment date of the Senior Discount Debentures, in lieu of paying cash interest on the Senior Discount Debentures that were owned by GEI II and GEI III, with an aggregate initial principal amount equal to the amount of cash interest otherwise payable on such interest payment date under the terms of the Senior Discount Debentures. In addition, GateHouse may, at its option, issue additional Senior Debentures to GEI II and GEI III on each interest payment date of the Senior Debentures, in lieu of paying cash interest on the Senior Debentures that are owned by GEI II and GEI III, with an aggregate initial principal amount equal to the amount of cash

 

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Table of Contents

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

interest otherwise payable on such interest payment date under the terms of the Senior Debentures. As a result of these agreements, interest due on the Senior Discount Debentures, including the additional Senior Debentures, had been reflected as a long-term liability on the Company’s consolidated balance sheet.

On August 1, 2003, GateHouse elected to issue Senior Debentures in lieu of paying cash interest on the Senior Discount Debentures that were owned by GEII II and GEI III. In conjunction with its election, LGP issued Senior Debentures to GEI II and GEI III in the amount of $687 and $3,335, respectively, which accrued interest at an annual rate of 11 5/8% and would become payable on February 1, 2009.

On February 1, 2004, GateHouse issued Senior Debentures to GEI II and GEI III in the amount of $727 and $3,529, respectively, in lieu of paying cash interest on the Senior Discount Debentures and the Senior Debentures that were owned by GEI II and GEI III.

On August 1, 2004, GateHouse issued Senior Debentures to GEI II and GEI III in the amount of $769 and $3,734, respectively, in lieu of paying cash interest on the Senior Discount Debentures and the Senior Debentures that were owned by GEI II and GEI III.

On February 1, 2005, GateHouse issued Senior Debentures to GEI II and GEI III in the amount of $814 and $3,951, respectively, in lieu of paying cash interest on the Senior Discount Debentures and the Senior Debentures that were owned by GEI II and GEI III.

As described below, on February 28, 2005, Green Equity received $87,503 in aggregate principal amount of New Senior Debentures pursuant to the Securities Exchange Agreements (see note 11). The New Senior Debentures were general unsecured obligations of GateHouse, and were structurally subordinated in right of payment to indebtedness under the New Credit Facility. The New Senior Debentures were scheduled to mature in March 2013. Interest was scheduled to accrue from the date of issuance and is payable semi-annually on March 1 and September 1 of each year, commencing September 1, 2005. In accordance with an agreement between Green Equity and GateHouse, GateHouse was permitted to issue additional New Senior Debentures in lieu of cash interest (in an aggregate initial principal amount equal to the amount of cash interest otherwise payable on such interest payment date).

The New Senior Debentures were subject to redemption, at the option of GateHouse, in whole or in part, at any time at a price equal to 100% of the principal amount of the New Senior Debentures, plus accrued and unpaid interest thereon to the redemption date. Upon a Change of Control, and subject to certain conditions, the holders of the New Senior Debentures had the right to require GateHouse to repurchase all of the New Senior Debentures at a price of 101% of the aggregate principal amount, plus accrued and unpaid interest to the repurchase date.

On February 28, 2005, upon consummation of the debenture exchange and the initial draw down under the New Credit Facility described below, GateHouse irrevocably called for redemption all of the outstanding Senior Discount Debentures in accordance with the Indenture for the Senior Discount Debentures (the SDD Indenture). Immediately following GateHouse’s call for redemption of the Senior Discount Debentures, GateHouse irrevocably deposited trust funds with U.S. Bank, the trustee, in an amount sufficient to pay the redemption price for the Senior Discount Debentures in full, thereby

 

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Table of Contents

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

satisfying and discharging the SDD Indenture. The redemption price consisted of 101.938% of the $19,800 aggregate principal amount thereof, plus accrued and unpaid interest to March 30, 2005 collectively, $20,561. Included in the $521 loss on extinguishment is $137 of deferred finance fees written off.

On February 28, 2005, upon consummation of the preferred stock exchange and satisfaction and discharge of the SDD Indenture, Operating Company irrevocably called for redemption all of the outstanding 9 3/8% Senior Subordinated Notes in accordance with the Indenture for the Senior Subordinated Notes (the SSN Indenture).

On March 29, 2005, Operating Company borrowed $180,000 principal amount of the Term Loan B under the New Credit Facility. On March 30, 2005, Operating Company used such proceeds, together with cash on hand, to redeem in full all of the outstanding Senior Subordinated Notes in accordance with the SSN Indenture. The redemption price consisted of 101.563% of the aggregate principal amount thereof, plus accrued and unpaid interest to March 30, 2005 collectively, $185,579. Included in the $4,479 loss on extinguishment is $1,666 of deferred finance fees written off.

On June 7, 2005, the Company repaid in full all of its obligations under the New Senior Debentures. The Company used funds drawn of the New Credit Facility to make the requisite termination payment of $90,329.

(9) Revolving Credit Facility and Term Loan B (Collectively, the Amended Credit Facility)

On April 18, 2000, the Operating Company entered into an agreement to amend and restate its $175,000 former revolving credit facility (Former Credit Facility). The amendment and restatement extended the maturity date of the revolving credit facility from January 2003 to March 2005, and included the issuance of a $100,000 Term Loan B. The Term Loan B was to mature in March 2007.

On May 10, 2001, the Operating Company entered into an amendment to its Former Credit Facility (Amended Credit Facility). The amendment decreased the aggregate commitment available under the revolving credit facility from $175,000 to $135,000 and amended the Cash Coverage Ratio and Senior Leverage Ratio as defined within the Amended Credit Facility.

The Term Loan B and the revolving credit facility bore interest at the Operating Company’s option equal to the Base Rate (as defined in the Amended Credit Facility) or the adjusted LIBOR rate for a eurodollar loan (as defined in the Amended Credit Facility) plus a margin that varies based upon a ratio set forth in the Amended Credit Facility. There was an individual margin applicable to each of the Term Loan B and the revolving credit facility. The Operating Company pays a fee on the aggregate amount of outstanding letters of credit. The Operating Company also paid a fee on the unused portion of the revolving credit facility. No principal payments were due on the revolving credit facility until the maturity date. At December 31, 2004, no borrowings were outstanding under the revolving credit facility and $60,057 was outstanding under the Term Loan B. The average interest rate on borrowings outstanding under the Amended Credit Facility as of December 31, 2004 was 5.9%.

On February 28, 2005, Operating Company repaid in full, and terminated all of its obligations under, the Amended Credit Facility, dated as of April 18, 2000, as amended. GateHouse and its other subsidiaries also terminated all of their respective security and guaranty obligations thereunder on

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

February 28, 2005. Operating Company used funds drawn from the New Credit Facility (see below) to make the requisite termination payment of $66,339. Included in loss on extinguishment of debt is $448 of deferred finance fees written off related to termination of the Amended Credit facility.

On February 28, 2005, Operating Company entered into a Credit Agreement with a syndicate of financial institutions led by Wells Fargo Bank, National Association (Wells Fargo), with U.S. Bank National Association (US Bank) as syndication agent, CIT Lending Services Corporation as documentation agent and Wells Fargo as administrative agent (the New Credit Facility). The New Credit Facility provides for a $280,000 principal amount New Term Loan B that matures in February 2012 and a revolving credit facility with a $50,000 aggregate commitment amount available, including a $10,000 sub-facility for letters of credit, that matures in February 2011. The New Credit Facility is secured by a first-priority security interest in substantially all of the tangible and intangible assets of Operating Company, GateHouse, and GateHouse’s other present and future direct and indirect subsidiaries. Additionally, the loans under the New Credit Facility are guaranteed, subject to specified limitations, by GateHouse and all of the future direct and indirect subsidiaries of Operating Company and GateHouse.

The New Term Loan B and the revolving credit facility bear interest at different rates, at Operating Company’s option, equal to the Alternate Base Rate for an ABR loan (as defined therein) or the Adjusted LIBOR Rate for a Eurodollar loan (as defined therein) plus the respective applicable margin. The applicable margin is based on: (1) whether the loan is an ABR loan or Eurodollar loan; and (2) the ratio of (a) indebtedness of Operating Company and its subsidiaries to (b) pro forma EBITDA for the 12-month period then ended. Operating Company also pays an annual fee equal to the applicable Eurodollar margin for the aggregate amount of outstanding letters of credit. Additionally, Operating Company pays a fee on the unused portion of the revolving credit facility. No principal payments are due on the revolving credit facility until its maturity date. The New Term Loan B requires quarterly principal payments of $768, beginning on June 30, 2005, until December 31, 2011 and a final principal payment of $286,000 on February 28, 2012, subject to reduction by the amount of any prepayments. The New Credit Facility contains financial covenants that require Operating Company to satisfy specified quarterly financial tests, including a minimum interest coverage ratio and a maximum leverage ratio. The New Credit Facility also contains affirmative and negative covenants, and events of default, customarily found in loan agreements for similar transactions. In conjunction with the New Credit Facility, the Company incurred costs of $2,345 which have been capitalized as deferred financing costs in the predecessor period and are being expensed over the stated duration of facility.

On February 28, 2005, Operating Company borrowed $4,000 principal amount of revolving credit loans and $100,000 principal amount of the New Term Loan B. The net proceeds were used in the manner described below, as well as to pay certain fees and expenses in connection with such transactions. On March 30, 2005, Operating Company borrowed the remaining $180,000 principal amount of the New Term Loan B, as described below.

In June 2006, the Company repaid the New Term Loan B and New Credit Facility in full (see note 18).

The Company uses certain derivative financial instruments to hedge the aggregate risk of interest rate fluctuations with respect to its long-term debt, which requires payments based on a variable interest rate index. These risks include: increases in debt rates above the earnings of the encumbered assets, increases in debt rates resulting in the failure of certain debt ratio covenants, increases in debt rates such that assets can no longer be refinanced, and earnings volatility.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

In order to reduce such risks, the Company primarily uses interest rate swap agreements to change a portion of floating-rate long term debt to fixed-rate long-term debt. This type of hedge is intended to qualify as a “cash-flow hedge” under SFAS No. 133. For these instruments, the effective portion of the change in the fair value of the derivative is recorded in Other Comprehensive Income in the Statement of Changes in Stockholders’ Equity (Deficit) and recognized in the Statement of Operations in the same period which the hedged transaction impacts earnings. The ineffective portion of the change in the fair value of the derivative is immediately recognized in earnings.

On June 23, 2005, the Company entered into an interest rate swap agreement based on a notional amount of $300 million. Commencing on the first day of each month beginning August 1, 2005, up to and including June 1, 2012, with a short final payment on June 15, 2012, the Company will pay a fixed rate of 4.135% in exchange for receipt of the one month LIBOR rate, to be reset the first day of each calculation period.

At December 31, 2005, the hedge was deemed ineffective, and accordingly, the fair value of the derivative was recognized through current earnings. As of December 31, 2005, the total change in the fair value of the derivative recognized in current period earnings was a gain of $10,807.

In 2005, the Company entered into the following agreements under its New Credit Facility:

(Predecessor)

 

  Ÿ   On May 27, 2005 and in connection with the Merger, the Company amended its New Credit Facility to allow for (i) payments to its holders of Senior Discount Notes, Senior Debentures, Senior Preferred Stock, and Junior Preferred Stock, (ii) a change in control, and (iii) execution of the Merger agreement.

(Successor)

 

  Ÿ   On December 9, 2005, the Company amended its New Credit Facility to provide the Company access to additional term loans of up to $50 million (Second Amendment).

 

  Ÿ   On December 12, 2005, the Company amended its New Credit Facility (Third Amendment), which recognized the issuance of $30 million in additional term loans to the Company as provided for under the Second Amendment.

(10) Long-term Liabilities

Long-term liabilities represent principal amounts due under the Company’s New Credit Facility and non-interest bearing noncompete agreements through 2010.

The aggregate amount of payments related to long-term liabilities at December 31, 2005 is as follows:

 

2006

   $ 3,295

2007

     3,295

2008

     3,222

2009

     3,183

2010

     3,090

Thereafter

     297,570
      
   $ 313,655
      

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

(11) Preferred Stock

As of December 31, 2005, GateHouse had the authority to issue up to 23,905,000 shares of capital stock, of which 21,250,000 shares are designated as preferred stock, par value $0.01 per share, and 2,655,000 shares are designated as common stock, par value $0.01 per share.

On February 28, 2005, GateHouse entered into Securities Exchange Agreements with each of GEI II and GEI III (together, Green Equity). In connection with the Securities Exchange Agreements, the parties exchanged the following securities on February 28, 2005:

Debenture Exchange.    Green Equity exchanged (1) (a) $69,200 in aggregate principal amount of GateHouse’s 11 5/8% Senior Discount Debentures due 2009, plus accrued and unpaid interest thereon to February 27, 2005 of $603, and (ii) $17,547 in aggregate principal amount of GateHouse’s 11 5/8% Senior Debentures due 2009, plus accrued and unpaid interest thereon to February 27, 2005 of $153, for (2) $87,503 in aggregate principal amount of GateHouse’s Senior Debentures due 2013 (the New Senior Debentures). The terms of the New Senior Debentures are described below.

Preferred Stock Exchange.    Green Equity exchanged (1) 4,521,022 shares of GateHouse’s Series A 14 3/4% Senior Redeemable Exchangeable Cumulative Preferred Stock, liquidation value $25 per share (the Series A Senior Preferred Stock), plus accumulated and unpaid dividends thereon to February 27, 2005 of $1,250, for (2) an aggregate of 114,277 shares of GateHouse’s Series B-1 14 3/4% Senior Redeemable Cumulative Preferred Stock, with an initial liquidation value of $1,000 per share (the Series B-1 Senior Preferred Stock). The terms of the Series B-1 Senior Preferred Stock are described below.

On February 28, 2005, upon consummation of the preferred stock exchange and satisfaction and discharge of the SDD Indenture, GateHouse irrevocably called for redemption all of the outstanding shares of Series A Senior Preferred Stock in accordance with the Certificate of Designations for the Series A Senior Preferred Stock. The initial draw down under the New Credit Facility included an amount sufficient to pay the redemption price for the Series A Senior Preferred Stock.

On March 15, 2005, GateHouse redeemed in full all of the outstanding shares of the Series A Senior Preferred Stock in accordance with the Certificate of Designations for the Series A Senior Preferred Stock. The redemption price consisted of 100% of the liquidation preference per share, plus accumulated and unpaid dividends per share to March 15, 2005, collectively, of $11,361.

On February 25, 2005, in connection with the New Credit Facility and related transactions, the Board of Directors of GateHouse (the Board) approved, and the requisite stockholders consented to, the third amendment to GateHouse’s Amended and Restated Certificate of Incorporation (the Third Amendment). On February 25, 2005, the Third Amendment was filed with the Secretary of State of the State of Delaware. The Third Amendment (i) amended the Certificate of Designations of the Series A Senior Preferred Stock to permit the Preferred Exchange, (ii) decreased the number of authorized shares of Series A Senior Preferred Stock from 21,000,000 shares to 20,500,000 shares, and (iii) amended the Certificate of Designations of the Series B 10% Junior Redeemable Cumulative Preferred Stock to duplicate, as applicable, the terms set forth in the Certificate of Designations of the Series B-1 Senior Preferred Stock.

On February 25, 2005, in connection with the New Credit Facility and related transactions, the Board authorized, and the requisite stockholders consented to, creating a new series of preferred stock, the Series B-1 Senior Preferred Stock.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

The Series B-1 Senior Preferred Stock was required to be redeemed by GateHouse in February 2013. The shares of Series B-1 Senior Preferred Stock were also subject to redemption, at the option of GateHouse, in whole or in part, at any time at a price equal to 100% of the liquidation preference, plus accumulated and unpaid dividends thereon to the redemption date. Upon a Change of Control (as defined therein), and subject to certain conditions, GateHouse must make an offer to repurchase all of the Series A Senior Preferred Stock at a price of 100% of the liquidation preference, plus accumulated and unpaid dividends thereon to the repurchase date.

On May 15, 2003, the Financial Accounting Standards Board issued 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 circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. For public companies, SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003. The Company adopted the provisions of SFAS No. 150 on July 1, 2003 as a public company. Accordingly, the Company’s mandatorily redeemable preferred stock has been classified as a liability on the balance sheet as of December 31, 2004. Dividends on the Company’s mandatorily redeemable preferred stock for the six months ended December 31, 2003 in the amount of $13,206, for the year ended December 31, 2004 in the amount of $29,019, and for the period from January 1, 2005 to June 5, 2005 in the amount of $13,484 have been included in the consolidated statements of operations as additional interest expense. Dividends on the Company’s mandatorily redeemable preferred stock for the six months ended June 30, 2003 in the amount of $12,409 were reported as an adjustment to net loss to arrive at net loss available to common stockholders.

(12) Income Taxes

Income tax expense (benefit) for the periods shown below consisted of:

 

     Current    Deferred     Total  

Year ended December 31, 2003 (Predecessor):

       

U.S. Federal

   $ —      $ (4,027 )   $ (4,027 )

State and local

     491      (1,155 )     (664 )
                       
   $ 491    $ (5,182 )   $ (4,691 )
                       

Year ended December 31, 2004 (Predecessor):

       

U.S. Federal

   $ 100    $ 331     $ 431  

State and local

     671      126       797  
                       
   $ 771    $ 457     $ 1,228  
                       

Period from January 1, 2005 to June 5, 2005 (Predecessor):

       

U.S. Federal

   $ —      $ (2,720 )   $ (2,720 )

State and local

     493      (800 )     (307 )
                       
   $ 493    $ (3,520 )   $ (3,027 )
                       

Period from June 6, 2005 to December 31, 2005 (Successor):

       

U.S. Federal

   $ —      $ 5,331     $ 5,331  

State and local

     151      1,568       1,719  
                       
   $ 151    $ 6,899     $ 7,050  
                       

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income (loss) from continuing operations before income taxes as a result of the following:

 

    

Year ended

December 31,

   

Period from

January 1,

2005

to June 5,

2005

   

Period from

June 6, 2005

to

December 31,

2005

 
     2003     2004      
     (Predecessor)     (Predecessor)     (Predecessor)     (Successor)  

Computed “expected” tax expense (benefit)

   $ (6,576 )   $ (10,024 )   $ (9,472 )   $ 5,649  

Increase (decrease) in income taxes resulting from:

        

State and local income taxes, net of federal benefit

     (442 )     526       (203 )     1,134  

Nondeductible meals and entertainment

     26       28       12       17  

Nondeductible interest

     5,801       10,658       4,726       —    

Nondeductible Merger costs

     —         —         1,958       —    

Nondeductible stock offering costs

     713       —         —         —    

Other

     234       40       (48 )     (30 )

Change in valuation allowance

     (4,447 )     —         —         280  
                                
   $ (4,691 )   $ 1,228     $ (3,027 )   $ 7,050  
                                

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2004 and 2005 are presented below:

 

     As of December 31,  
     2004     2005  
     (Predecessor)     (Successor)  

Deferred tax assets:

    

Accounts receivables, principally due to allowance for doubtful accounts

   $ 619     $ 508  

Income tax credit carryforwards

     100       —    

Accrued expenses

     10,583       1,614  

Net operating losses

     18,538       47,043  
                

Gross deferred tax assets

     29,840       49,165  

Less valuation allowance

     (250 )     (32,430 )
                

Net deferred tax assets

     29,590       16,735  
                

Deferred tax liabilities:

    

Deferred gain from securities transactions

     —         3,643  

Long-lived and intangible assets, principally due to differences in depreciation and amortization

     53,842       83,014  
                

Gross deferred tax liabilities

     53,842       86,657  
                

Net deferred tax liability

   $ 24,252     $ 69,922  
                

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the realizability of the Company’s deferred tax assets, which are principally net operating loss carryforwards, management considers the reversal of deferred tax liabilities which are scheduled to reverse during the carryforward period and tax planning strategies. As of December 31, 2004 and 2005, valuation allowance of $250 and $32,430, respectively, have been provided by the Company relative to deferred tax assets that may not be ultimately realized. The valuation allowance was unchanged in 2004 and increased by $32,180 in 2005, which was primarily reflected in purchase accounting.

At December 31, 2005, the Company has net operating loss carryforwards for Federal and state income tax purposes of approximately $117,600, which are available to offset future taxable income, if any. These Federal and state net operating loss carryforwards begin to expire on various dates from 2018 through 2025. A portion of these net operating losses are subject to the limitations of Internal Revenue Code Section 382. This section provides limitations on the availability of net operating losses to offset current taxable income if significant ownership changes have occurred for Federal tax purposes.

(13) Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share (EPS):

 

    Year Ended December 31,    

Period from

January 1,

2005

to June 5,

2005

   

Period from

June 6, 2005

to

December 31,

2005

    2003     2004      
    (Predecessor)     (Predecessor)     (Predecessor)     (Successor)

Numerator for earnings per share calculation:

       

Income (loss) from continuing operations

  $ (14,650 )   $ (30,711 )   $ (24,831 )   $ 9,565

Dividends on mandatorily redeemable preferred stock

    (12,409 )     —         —         —  
                             

Income (loss) from continuing operations available to common stockholders

  $ (27,059 )   $ (30,711 )   $ (24,831 )   $ 9,565
                             

Net income (loss)

  $ (14,164 )   $ (26,085 )   $ (24,831 )   $ 9,565

Dividends on mandatorily redeemable preferred stock

    (12,409 )     —         —         —  
                             

Net income (loss) available to common stockholders

  $ (26,573 )   $ (26,085 )   $ (24,831 )   $ 9,565
                             

Denominator for earnings per share calculation:

       

Basic and diluted weighted average shares outstanding

    2,158,833       2,158,833       2,158,833       226,400

Income (loss) per share—basic and diluted:

       

Income (loss) from continuing operations

  $ (12.53 )   $ (14.23 )   $ (11.50 )   $ 42.25

Income from discontinued operations, net of taxes

  $ 0.23     $ 2.14     $ —       $ —  

Net income (loss)

  $ (12.31 )   $ (12.08 )   $ (11.50 )   $ 42.25

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

(14) Employee Benefit Plans

The Company maintains certain benefit plans for its employees.

The Company maintains a defined contribution plan designed to conform to IRS rules for 401(k) plans for all of its employees satisfying minimum service requirements as set forth under the plan. The plan allows for a matching contribution at the discretion of the Company. The Company did not provide a matching contribution during 2003, 2004, or 2005.

The Company maintains three nonqualified deferred compensation plans, as described below, for certain of its employees.

The Company maintains the Liberty Group Publishing, Inc. Publishers’ Deferred Compensation Plan (Publishers Plan), a nonqualified deferred compensation plan for the benefit of certain designated publishers of the Company’s newspapers. Under the Publishers Plan, the Company credits an amount to a bookkeeping account established for each participating publisher pursuant to a pre-determined formula, which is based upon the gross operating profits of each such publisher’s newspaper. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. The amounts credited to the bookkeeping account on behalf of each participating publisher vest on an installment basis over a period of 15 years. A participating publisher forfeits all amounts under the Publishers Plan in the event that the publisher’s employment with the Company is terminated for “cause” as defined in the Publishers Plan. Amounts credited to a participating publisher’s bookkeeping account are distributable upon termination of the publisher’s employment with the Company and will be made in a lump sum or installments as elected by the publisher. The Company recorded $159, $193, $98, and $70 of compensation expense related to the Publishers Plan for the years ended December 31, 2003 and 2004, period from January 1, 2005 to June 5, 2005, and the period from June 6, 2005 to December 31, 2005, respectively.

The Company maintains the Liberty Group Publishing, Inc. Executive Benefit Plan (Executive Benefit Plan), a nonqualified deferred compensation plan for the benefit of certain key employees of the Company. Under the Executive Benefit Plan, the Company credits an amount, determined at the Company’s sole discretion, to a bookkeeping account established for each participating key employee. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. The amounts credited to the bookkeeping account on behalf of each participating key employee vest on an installment basis over a period of 5 years. A participating key employee forfeits all amounts under the Executive Benefit Plan in the event that the key employee’s employment with the Company is terminated for “cause” as defined in the Executive Benefit Plan. Amounts credited to a participating key employee’s bookkeeping account are distributable upon termination of the key employee’s employment with the Company, and will be made in a lump sum or installments as elected by the key employee. The Company recorded $77, $61, $29, and $21 of compensation expense related to the Executive Benefit Plan for the years ended December 31, 2003 and 2004, period from January 1, 2005 to June 5, 2005, and the period from June 6, 2005 to December 31, 2005, respectively.

The Company maintains the Liberty Group Publishing, Inc. Executive Deferral Plan (Executive Deferral Plan), a nonqualified deferred compensation plan for the benefit of certain key employees of the Company. Under the Executive Deferral Plan, eligible key employees may elect to defer a portion of their compensation for payment at a later date. Currently, the Executive Deferral Plan allows a

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

participating key employee to defer up to 100% of his or her annual compensation until termination of employment or such earlier period as elected by the participating key employee. Amounts deferred are credited to a bookkeeping account established by the Company for this purpose. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. Amounts deferred under the Executive Deferral Plan are fully vested and nonforfeitable. The amounts in the bookkeeping account are payable to the key employee at the time and in the manner elected by the key employee.

(15) Stock Option Plan

In February 1999, the Company adopted its 1999 Stock Option Plan (the Option Plan) under which certain employees may be granted the right to purchase shares of common stock. Pursuant to the Option Plan, GateHouse has granted incentive stock options and two types of nonqualified stock options, one type for publishers and the other type for corporate employees. Stock options may be exercised only to the extent they have vested in accordance with the provisions described in the individual option award agreements. Generally, options vest under the incentive stock option awards on the first anniversary of the grant date. Generally, under the nonqualified stock option awards for publishers, options vest with respect to 50% of the shares on the third anniversary of the grant date and with respect to the remaining 50% on the eighth anniversary of the grant date. However, the vesting period for the remaining 50% may be accelerated if certain financial targets are met. Generally, options vest under the nonqualified stock option awards for corporate employees on the third anniversary of the grant date. In conjunction with the Merger, each outstanding option under the Option Plan was cancelled for cash consideration per share equal to the difference between the conversion amount of $10.00 per share or an aggregate amount of $93 and the Option Plan was terminated. In June 2006, the stock option plan was terminated.

Stock option activity for the periods indicated is as follows:

 

     Shares     Weighted-
average
exercise price

Outstanding on December 31, 2002 (Predecessor)

   25,700     $ 5.75

Canceled

   (2,275 )     6.26
        

Outstanding on December 31, 2003 (Predecessor)

   23,425       5.49

Granted

   3,500       10.00

Canceled

   (2,250 )     6.56
        

Outstanding on December 31, 2004 (Predecessor)

   24,675       6.03

Canceled as of June 5, 2005

   (24,675 )     6.03
        

Outstanding at December 31, 2005 (Successor)

   —         —  
        

(16) Commitments and Contingencies

In the ordinary course of business, the Company is a party to various administrative and legal proceedings. In the opinion of management, the ultimate outcome of these matters are not expected to have a material impact on the liquidity, results of operations, or financial condition of the Company. Further, the Company does not believe that the amount of any additional liability that could be

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

reasonably possible with respect to such matters will have a material adverse effect on its financial results. The Company also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See note 12 for discussion related to income tax contingencies.

As of December 31, 2005, the Company has outstanding letters of credit amounting to $3,050, which reduce the amount of available borrowing capacity under the New Credit Facility.

(17) Related-party Transactions

The Company paid $1,480, $1,480 and $768 in management fees to Leonard Green & Partners, L.P. in 2003, 2004, and the period from January 1, 2005 through June 5, 2005, respectively. These costs have been included within selling, general, and administrative expenses on the accompanying statements of operations. In conjunction with the Merger, the Company paid $2,850 to a third party to cancel a hedging agreement entered into by the Parent on the Company’s behalf, which has been reported as a transaction cost in the successor period. At December 31, 2005, the Company owed Parent $529 for consulting expenses that Parent had paid on the Company’s behalf.

(18) Subsequent Events

On June 6, 2006, the Company acquired substantially all of the assets, and assumed certain liabilities of CP Media for $230,000 and acquired all of the equity interests of Enterprise NewsMedia, LLC for $180,000 (collectively, the “2006 Acquisitions”). In conjunction with the 2006 Acquisitions, the Company entered into the following new financial arrangements (2006 Refinancing) with a syndicate of financial institutions with Wachovia Bank National Association as Administrative Agent.

 

  Ÿ   a $610,000 first lien credit facility, consisting of a $570,000 term loan facility which matures in December 2013 and bears interest equal to LIBOR plus 225 basis points and a $40,000 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, 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; and,

 

  Ÿ   a $152,000 second lien credit 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 equal to LIBOR plus 150 basis points.

The proceeds from the above arrangements were used to finance the Company’s 2006 Acquisitions and repay the Company’s New Term Loan B and New Credit Facility plus all accrued interest.

In anticipation of the 2006 Refinancing, on May 10, 2006, the Company entered into an interest rate swap with a notional amount of $270,000 maturing July 2011. Under the swap agreement, the Company receives interest equivalent to one-month LIBOR and pays a fixed rate of interest of 5.359% with settlements occurring monthly. The Company has designated the interest rate swap as a cash flow hedge under SFAS No. 133.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheet

March 31, 2006

(In thousands, except share data)

 

Assets   

Current assets:

  

Cash and cash equivalents

   $ 992  

Accounts receivable, net of allowance for doubtful accounts of $1,629

     22,261  

Inventory

     3,673  

Prepaid expenses

     1,310  

Deferred income taxes

     2,121  

Other current assets

     383  
        

Total current assets

     30,740  

Property, plant, and equipment, net of accumulated depreciation of $4,152

     58,450  

Goodwill

     316,717  

Intangible assets, net of accumulated amortization of $7,352

     214,704  

Deferred financing costs, net

     723  

Other assets

     17,602  
        

Total assets

   $ 638,936  
        
Liabilities and Stockholders’ Equity   

Current liabilities:

  

Current portion of Term Loan B

   $ 3,071  

Current portion of long-term liabilities

     224  

Accounts payable

     1,405  

Accrued expenses

     8,424  

Deferred revenue

     9,145  
        

Total current liabilities

     22,269  

Long-term liabilities:

  

Borrowings under revolving credit facility

     6,090  

Term Loan B, less current portion

     300,587  

Long-term liabilities, less current portion

     432  

Deferred income taxes

     74,044  
        

Total liabilities

     403,422  
        

Stockholders’ equity:

  

Preferred stock, $0.01 par value, 21,250,000 shares authorized, none issued and outstanding

     —    

Common stock, $0.01 par value. 2,655,000 shares authorized, 229,850 shares issued and outstanding

     2  

Additional paid-in capital

     223,343  

Accumulated other comprehensive income

     2,272  

Notes receivable

     (250 )

Retained earnings

     10,147  
        

Total stockholders’ equity

     235,514  
        

Total liabilities and stockholders’ equity

   $ 638,936  
        

See accompanying notes to unaudited condensed consolidated financial statements.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

Three Months Ended March 31, 2005 and 2006

(In thousands, except share and per share data)

 

     2005     2006  
     (Predecessor)     (Successor)  

Revenues:

    

Advertising

   $ 34,846     $ 36,459  

Circulation

     8,233       8,495  

Commercial printing and other

     4,869       5,021  
                

Total revenues

     47,948       49,975  

Operating costs and expenses:

    

Operating costs

     24,336       25,789  

Selling, general and administrative

     13,706       16,476  

Depreciation and amortization

     3,468       3,599  

Loss on sale of assets

     —         (441 )
                

Income from operations

     6,438       3,670  

Interest expense—debt

     8,648       5,176  

Interest expense—dividends on mandatorily redeemable preferred stock

     7,780       —    

Amortization of deferred financing costs

     546       31  

Unrealized gain on derivative instrument

     —         (2,605 )

Loss on early extinguishment of debt

     5,525       —    
                

Income (loss) from operations before income taxes

     (16,061 )     1,068  

Income tax expense (benefit)

     (3,098 )     486  
                

Net income (loss)

   $ (12,963 )   $ 582  
                

Basic and diluted income (loss) per share

   $ (6.00 )   $ 2.56  

Weighted average common shares outstanding

     2,158,833       227,644  
                

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2005 and 2006

(In thousands)

 

     2005     2006  
     (Predecessor)     (Successor)  

Cash flows from operating activities:

    

Net income (loss)

   $ (12,963 )   $ 582  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     3,468       3,599  

Amortization of deferred financing costs

     546       31  

Unrealized gain on derivative instrument

     —         (2,605 )

Issuance of senior debentures in lieu of paying cash interest on senior discount debentures and senior debentures held by affiliates

     4,765       —    

Change in accrued interest on senior discount debentures and senior debentures held by affiliates

     (2,290 )     —    

Noncash compensation

     —         404  

Deferred taxes

     (3,259 )     487  

Loss on sale of assets

     —         441  

Loss on early extinguishment of debt

     5,525       —    

Interest expense—dividends on mandatorily redeemable preferred stock

     7,780       —    

Changes in assets and liabilities, net of acquisitions:

    

Accounts receivable, net

     598       326  

Inventory

     262       (252 )

Prepaid expenses and other assets

     95       65  

Accounts payable

     141       (211 )

Accrued expenses

     (8,988 )     (1,879 )

Other long-term liabilities

     (58 )     (73 )

Deferred revenue

     157       294  
                

Net cash (used in) provided by operating activities

     (4,221 )     1,209  
                

Cash flows from investing activities:

    

Purchases of property, plant, and equipment

     (544 )     (2,886 )

Proceeds from sale of publications and other assets

     —         2,859  

Acquisitions, net of cash acquired

     (81 )     (75 )
                

Net cash used in investing activities

     (625 )     (102 )
                

Cash flows from financing activities:

    

Extinguishment of senior subordinated notes, net of fees

     (182,813 )     —    

Extinguishment of senior discount notes, held by third parties

     (20,184 )     —    

Extinguishment of senior preferred stock, held by third parties

     (11,361 )     —    

Repayments of Term Loan B

     (60,057 )     (768 )

Payment of debt issuance costs

     (2,302 )     —    

Net borrowings under new term loan

     280,000       —    

Net borrowings (repayments) under revolving credit facility

     4,000       (2,410 )
                

Net cash provided by (used in) financing activities

     7,283       (3,178 )
                

Net increase (decrease) in cash and cash equivalents

     2,437       (2,071 )

Cash and cash equivalents, at beginning of year

     3,276       3,063  
                

Cash and cash equivalents, at end of period

   $ 5,713     $ 992  
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Three Months Ended March 31, 2006

(In thousands, except share data)

 

    Common stock  

Additional
paid-in

capital

   

Accumulated
other
comprehensive

income

 

Deferred

compensation

   

Notes

receivable

   

Retained

earnings

  Total
    Shares   Amount            

Balance at December 31, 2005

  226,400   $ 2   $ 226,398       —     $ (3,909 )   $ —       $ 9,565   $ 232,056

Reclassification of deferred compensation

  —       —       (3,909 )     —       3,909       —         —       —  

Restricted share grants

  3,200     —       604       —       —         —         —       604

Unrealized gain on derivative instrument

  —       —       —         2,272     —         —         —       2,272

Issuance of common stock

  250     —       250       —       —         (250 )     —       —  

Net income

  —       —       —         —       —         —         582     582
                                                   

Balance as of March 31, 2006

  229,850   $ 2   $ 223,343     $ 2,272   $ —       $ (250 )   $ 10,147   $ 235,514
                                                   

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share data)

(1) Unaudited Financial Statements and Basis of Presentation

The accompanying condensed consolidated financial statements of GateHouse Media, Inc. and subsidiaries (the Company) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in comprehensive annual financial statements presented in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules and regulations.

Management believes that the accompanying condensed consolidated financial statements contain all adjustments (which include normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial condition, results of operations and cash flows for the periods presented. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2005, included elsewhere herein.

On May 9, 2005, an affiliate of Fortress Investment Group LLC, FIF III Liberty Holdings LLC (Parent), FIF III Liberty Acquisitions, LLC, a wholly owned subsidiary of Parent (Merger Subsidiary) and the Company entered into an agreement that provided for the merger of Merger Subsidiary with and into the Company, with the Company continuing as a wholly owned subsidiary of Parent (the Merger). The Merger was completed on June 6, 2005. The total value of the transaction was approximately $527,000.

The Merger resulted in a new basis of accounting under Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. This change creates many differences between reporting for the Company pre-Merger, as predecessor, and the Company post-Merger, as successor. The accompanying consolidated financial statements and the notes to consolidated financial statements reflect separate reporting periods for the predecessor and successor company.

(2) Stock-based Employee Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment. SFAS No. 123(R) supersedes SFAS No. 123, Accounting for Stock-Based Compenstation and Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and requires that all share-based payments to employees, including grants of employee stock options, be recognized in the consolidated financial statements over the service period (generally the vesting period) based on fair values measured on grant dates. The Company adopted SFAS No. 123(R) using the modified prospective transition method, therefore, prior results were not restated. Under the modified prospective method, share-based compensation is recognized for new awards, the modification, repurchase or cancellation of awards and the remaining portion of service under previously granted, unvested awards outstanding as of the date of adoption. Accordingly, the expense required under SFAS No. 123(R) has been recorded beginning January 1, 2006. In addition, the Company eliminated the December 31, 2005 balance of deferred compensation of $3,909 by reducing additional paid-in capital.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

The Company recognized total compensation cost for share-based payments of $404 for the three months ended March 31, 2006. There was no compensation cost recognized in the three month period ended March 31, 2005. The income tax benefit related to share-based payments recognized in the statement of operations for the three months ended March 31, 2006 was $112. The total compensation cost not yet recognized related to non-vested awards as of March 31, 2006 was $7,664, which is expected to be recognized through March 2011.

(a) Stock Option Plan and Other Awards

In January 2006, a management investor purchased 250 shares of common stock at a discount pursuant to the investor’s management stockholder agreement. The purchase was determined to be compensatory and in accordance with SFAS No. 123(R), the Company recognized $125 in employee compensation expense related to this purchase during the three months ended March 31, 2006.

In February 1999, the Company adopted the 1999 Stock Option Plan (the Option Plan) under which certain employees were granted the right to purchase shares of common stock. As of June 5, 2005, the Company cancelled the Option Plan. Therefore, no compensation expense was recorded for the three months ended March 31, 2006 relating to stock options.

(b) Pre-Adoption Pro Forma Information

No awards were granted or vested during the three months ended March 31, 2005 and therefore, pro forma disclosures are not required.

(c) Restricted Stock Grants

The Company issued Restricted Share Grants (RSGs) to certain management investors pursuant to each investor’s management stockholder agreement (Plan) as follows: 4,425 shares were issued on June 6, 2005 and 3,200 were issued during the three months ended March 31, 2006. Each RSG is convertible into one share of common stock. Under the Plan, the RSGs vest by one-third (1/3) on each of the third, fourth and fifth anniversaries from the grant date. In the event the management investor is terminated without cause, the RSGs immediately vest at the percentage that would have vested under the normal vesting period on the next succeeding anniversary date following such termination. In the event the management investor’s employment is terminated without cause within twelve months after a change in control, all unvested RSGs become immediately vested at the termination date. During the period prior to the lapse and removal of the vesting restrictions, the management investor will have all of the rights of a stockholder, including without limitation, the right to vote and the right to receive all dividends or other distributions. As a result, the RSG’s are reflected as outstanding common stock. The value of the RSG’s on the date of issuance is recognized as employee compensation expense over the vesting period or through the grantee’s eligible retirement date, if shorter, with an increase to additional paid-in capital. For the three months ended March 31, 2006, the Company recognized $279 in employee compensation expense related to RSGs.

At March 31, 2006, there were 7,625 RSGs issued and outstanding with a weighted average grant date fair value of $1,210, none of which are vested.

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

Restricted Stock Grant activity was as follows:

 

     Number
of units
   Weighted-average
grant date fair value

Unvested at December 31, 2005

   4,425    $ 1,000

Granted

   3,200      1,501

Vested

   —        —  

Forfeited

   —        —  
           

Unvested at March 31, 2006

   7,625    $ 1,210
           

SFAS 123(R) requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. Estimated forfeitures are based on historical forfeiture rates and approximated 6%. Estimated forfeitures will be reassessed in subsequent periods and the estimate may change based on new facts and circumstances. Prior to January 1, 2006, actual forfeitures were included in pro forma stock compensation disclosures as they occurred.

(3) Reclassifications

Certain amounts in the prior period (predecessor) consolidated financial statements have been reclassified to conform to the 2006 successor presentation.

(4) Fortress Acquisition—2005

On May 9, 2005, an affiliate of Fortress Investment Group LLC, FIF III Liberty Holdings LLC (Parent), FIF III Liberty Acquisitions, LLC, a wholly owned subsidiary of Parent (Merger Subsidiary) and the Company entered into an agreement that provided for the merger of Merger Subsidiary with and into the Company, with the Company continuing as a wholly owned subsidiary of Parent (the Merger). The Merger was completed on June 6, 2005. The total value of the transaction was approximately $527,000.

The unaudited pro forma condensed consolidated statements of operations information for 2005, set forth below, presents the results of operations as if the Merger had occurred on January 1, 2005 and is not necessarily indicative of future results or actual results that would have been achieved had the Merger occurred as of the beginning of such period. Pro forma results for 2005 include $             of early retirement, transaction and debt extinguishment costs related to the Merger. Other acquisitions described in (a) and (b), above, and (d), below, are excluded.

 

    

Three months ended

March 31, 2005

 
     (unaudited)  

Revenues

   $ 47,948  

Net loss

     (10,041 )

Net loss per common share basic and diluted

   $ (44.35 )

 

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Table of Contents

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

(5) Goodwill

The changes in the carrying amount of goodwill for the period from January 1, 2006 to March 31, 2006 is as follows:

 

Balance at December 31, 2005

   $ 316,691

Other

     26
      

Balance at March 31, 2006

   $ 316,717

(6) Senior Subordinated Notes, Senior Discount Debentures, and Senior Debentures

On February 28, 2005, upon consummation of the debenture exchange and the initial draw down under the New Credit Facility described below, GateHouse irrevocably called for redemption all of the outstanding Senior Discount Debentures in accordance with the Indenture for the Senior Discount Debentures (the SDD Indenture). Immediately following GateHouse’s call for redemption of the Senior Discount Debentures, GateHouse irrevocably deposited trust funds with U.S. Bank, the trustee, in an amount sufficient to pay the redemption price for the Senior Discount Debentures in full, thereby satisfying and discharging the SDD Indenture. The redemption price consisted of 101.938% of the $19,800 aggregate principal amount thereof, plus accrued and unpaid interest to March 30, 2005 collectively, $20,561. Included in the $521 loss on extinguishment is $137 of deferred finance fees written off.

On February 28, 2005, upon consummation of the preferred stock exchange and satisfaction and discharge of the SDD Indenture, Operating Company irrevocably called for redemption all of the outstanding 9 3/8% Senior Subordinated Notes in accordance with the Indenture for the Senior Subordinated Notes (the SSN Indenture).

On March 29, 2005, Operating Company borrowed $180,000 principal amount of the Term Loan B under the New Credit Facility. On March 30, 2005, Operating Company used such proceeds, together with cash on hand, to redeem in full all of the outstanding Senior Subordinated Notes in accordance with the SSN Indenture. The redemption price consisted of 101.563% of the aggregate principal amount thereof, plus accrued and unpaid interest to March 30, 2005 collectively, $185,579. Included in the $4,479 loss on extinguishment is $1,666 of deferred finance fees written off.

On February 28, 2005, Operating Company repaid in full, and terminated all of its obligations under, the Amended Credit Facility, dated as of April 18, 2000, as amended. GateHouse and its other subsidiaries also terminated all of their respective security and guaranty obligations thereunder on February 28, 2005. Operating Company used funds drawn from the New Credit Facility (see below) to make the requisite termination payment of $66,339. Included in loss on extinguishment of debt is $448 of deferred finance fees written off related to termination of the Amended Credit facility.

On February 28, 2005, Operating Company entered into a Credit Agreement with a syndicate of financial institutions led by Wells Fargo Bank, National Association (Wells Fargo), with U.S. Bank National Association (US Bank) as syndication agent, CIT Lending Services Corporation as documentation agent and Wells Fargo as administrative agent (the New Credit Facility). The New Credit Facility provides for a $280,000 principal amount New Term Loan B that matures in February 2012 and a revolving credit facility with a $50,000 aggregate commitment amount available, including a

 

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GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

(In thousands, except share data)

 

$10,000 sub-facility for letters of credit, that matures in February 2011. The New Credit Facility is secured by a first-priority security interest in substantially all of the tangible and intangible assets of Operating Company, GateHouse, and GateHouse’s other present and future direct and indirect subsidiaries. Additionally, the loans under the New Credit Facility are guaranteed, subject to specified limitations, by GateHouse and all of the future direct and indirect subsidiaries of Operating Company and GateHouse.

(7) Fair Value of Financial Derivative

On June 23, 2005, the Company entered into an interest rate swap agreement based on a notional amount of $300 million. Commencing on the first day of each month beginning August 1, 2005, up to and including June 1, 2012, with a short final payment on June 15, 2012, the Company will pay a fixed rate of 4.135% in exchange for receipt of the one month LIBOR rate, to be reset the first day of each calculation period.

At December 31, 2005, the hedge was deemed ineffective, and accordingly, the fair value of the derivative was recognized through current earnings. As of December 31, 2005, the total change in the fair value of the derivative recognized in current period earnings was a gain of $10,807.

Prior to the redesignation of the swap, the increase in fair value of the swap for the period from January 1, 2006 through February 20, 2006 of $2,605 was recognized in earnings. On February 20, 2006, the Company redesignated the interest rate swap as a cash flow hedge for accounting purposes. As a result, the effective portion of the increase in fair value of the swap for the period from February 21, 2006 through March 31, 2006 of $2,272, net of taxes of $1,514, was recognized into accumulated other comprehensive income during the three months ended March 31, 2006. No ineffectiveness which would be recognized in earnings was noted for the current hedging period.

(8) Related Party Transactions

The Company paid $370 in management fees to Leonard Green & Partners LLP during the three months ended March 31, 2005. These costs have been included within selling, general administrative expenses on the accompanying statements of operations.

 

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Table of Contents

Report of Independent Auditors

To the Board of Directors and Shareholders of

Herald Media Holdings, Inc.:

In our opinion, the accompanying balance sheets and the related statements of operations, of changes in redeemable preferred stock and parent company deficit and of cash flows present fairly, in all material respects, the financial position of CP Media, which is a division of Herald Media Holdings, Inc. (the “Company”) at July 3, 2005 and April 2, 2006, and the results of their operations and their cash flows for the years ended June 27, 2004 and July 3, 2005 and for the nine months ended April 2, 2006, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s and CP Media’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

CP Media is comprised of the Company’s community newspaper publishing operations. The accompanying statements include allocations of certain expenses directly attributable to the operations of CP Media as well an allocation of the Company’s redeemable preferred stock and long-term debt and the related expenses, which management believes is appropriate in the circumstances. The amounts recorded for these allocations are not necessarily representative of the amounts that would have been reflected in the statements had CP Media operated as a separate, stand-alone entity.

As discussed in Note 2 of the financial statements, CP Media changed its method of accounting for redeemable preferred stock effective July 4, 2005.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

July 13, 2006

 

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Table of Contents

CP MEDIA

Balance Sheets

July 3, 2005 and April 2, 2006

(In thousands)

 

     

July 3,

2005

   

April 2,

2006

 
Assets     

Current Assets

    

Accounts receivable, less allowance of $1,530 and $1,626 at July 3, 2005 and April 2, 2006, respectively

   $ 10,365     $ 9,315  

Inventories

     606       661  

Prepaid expenses and other current assets

     1,375       2,098  
                

Total current assets

     12,346       12,074  

Property, plant and equipment, net

     12,761       12,435  

Deferred financing costs, net

     1,768       1,674  

Intangible assets, net

     7,808       6,667  

Goodwill

     103,441       103,441  

Other assets

     2,030       1,724  
                

Total Assets

   $ 140,154     $ 138,015  
                
Liabilities, Redeemable Preferred Stock and Parent Company Deficit     

Current Liabilities

    

Current portion of long-term debt

   $ 1,033     $ 975  

Book overdraft

     554       890  

Accounts payable and accrued expenses

     4,665       4,064  

Accrued payroll and related expenses

     3,228       1,919  

Deferred revenues

     4,226       4,084  
                

Total current liabilities

     13,706       11,932  

Long-term debt

     120,935       119,472  

Deferred income taxes

     9,283       11,543  

Other long-term liabilities

     2,209       2,092  

Redeemable preferred stock, Series A

     —         47,960  
                

Total liabilities

     146,133       192,999  

Commitments and contingencies (Notes 8 and 9)

    

Redeemable preferred stock, Series A, liquidation preference of $44,857 at July 3, 2005

     43,670       —    

Parent company deficit

     (49,649 )     (54,984 )
                

Total Liabilities, Redeemable Preferred Stock and Parent Company Deficit

   $ 140,154     $ 138,015  
                

 

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Table of Contents

CP MEDIA

Statements of Operations

For the years ended June 27, 2004, July 3, 2005 and for the nine months ended April 2, 2006

(In thousands)

 

     Year Ended    

Nine Months
Ended

April 2, 2006

 
     June 27,
2004
    July 3,
2005
   
     (52 weeks)     (53 weeks)     (39 weeks)  

Revenues

      

Advertising

   $ 82,043     $ 85,631     $ 61,841  

Circulation

     11,778       11,570       8,069  

Online and other revenue—related party

     625       1,055       895  

Commercial print and other

     2,510       2,630       1,956  
                        

Total Revenues

     96,956       100,886       72,761  
                        

Operating Expenses

      

Editorial

     14,371       13,993       10,603  

Production

     14,302       15,715       11,676  

Circulation

     15,275       15,290       10,804  

Advertising

     13,868       13,939       9,961  

General and administrative

     20,735       22,781       16,264  

Depreciation and amortization

     4,886       4,431       2,982  

Net gain on disposal of property, plant and equipment

     (270 )     (49 )     (34 )
                        

Total Operating Expenses

     83,167       86,100       62,256  
                        

Operating Income

     13,789       14,786       10,505  

Interest expense

     4,527       7,091       6,953  

Write-off of unamortized deferred financing costs

     25       1,365       —    

Redeemable preferred stock interest expense

     —         —         4,290  
                        

Income (loss) before provision for income taxes

     9,237       6,330       (738 )

Provision for income taxes

     3,065       3,007       2,260  
                        

Net income (loss)

     6,172       3,323       (2,998 )

Less: accretion of redeemable preferred stock

     10,939       5,631       —    
                        

Net loss available to Parent

   $ (4,767 )   $ (2,308 )   $ (2,998 )
                        

 

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Statements of Changes in Redeemable Preferred Stock and Parent Company Deficit

(In thousands, except share amounts)

 

     Redeemable Preferred
Stock Series A
   

Parent
Company

Deficit

 
     Shares     Amount    

Balance at June 29, 2003

   628,000     $ 81,699     $ (43,090 )

Accretion of redeemable preferred stock, Series A

       10,483       (10,483 )

Accretion of redeemable preferred stock, Series A issuance costs

       456       (456 )

Net income

         6,172  

Intercompany transfers, net

         3,035  
                      

Balance at June 27, 2004

   628,000       92,638       (44,822 )

Accretion of redeemable preferred stock, Series A

       5,451       (5,451 )

Accretion of redeemable preferred stock, Series A issuance costs

       180       (180 )

Repurchase and redemption of redeemable preferred stock, Series A

   (362,127 )     (54,599 )     —    

Net income

         3,323  

Intercompany transfers, net

         (2,519 )
                      

Balance at July 3, 2005

   265,873       43,670       (49,649 )

Change in accounting principle (Note 2)

   (265,873 )     (43,670 )     —    

Net loss

         (2,998 )

Intercompany transfers, net

         (2,337 )
                      

Balance at April 2, 2006

   —       $ —       $ (54,984 )
                      

 

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Statements of Cash Flows

For the years ended June 27, 2004, July 3, 2005 and for the nine months ended April 2, 2006

(In thousands)

 

     Year Ended    

Nine Months
Ended

April 2, 2006

 
     June 27,
2004
    July 3,
2005
   
     (52 weeks)     (53 weeks)     (39 weeks)  

Cash flows from operating activities

      

Net income (loss)

   $ 6,172     $ 3,323     $ (2,998 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities

      

Depreciation and amortization

     4,886       4,431       2,982  

Amortization of deferred financing costs

     665       329       237  

Write-off of unamortized deferred financing costs

     25       1,365       —    

Redeemable preferred stock interest expense

     —         —         4,290  

Net gain on disposal of property, plant and equipment

     (270 )     (49 )     (34 )

Provision for doubtful accounts

     356       651       377  

Lease agreement exit costs

     (132 )     679       270  

Deferred income taxes

     3,003       3,007       2,260  

Changes in operating assets and liabilities, net of effects of acquisition

      

Accounts receivable

     (946 )     (518 )     673  

Inventories

     (4 )     (151 )     (55 )

Prepaid expenses and other current assets

     (515 )     558       (723 )

Other assets

     (2,437 )     407       306  

Book overdraft

     395       (700 )     336  

Accounts payable and accrued expenses

     (878 )     835       (601 )

Accrued payroll and related expenses

     296       862       (1,309 )

Other current liabilities

     40       (50 )     —    

Deferred revenues

     (606 )     (77 )     (142 )

Other long-term liabilities

     501       (398 )     (353 )
                        

Net cash provided by operating activities

     10,551       14,504       5,516  
                        

Cash flows from investing activities

      

Purchase of property, plant and equipment

     (1,347 )     (2,516 )     (1,533 )

Business asset acquisition

     —         (456 )     —    

Proceeds from disposal of property, plant and equipment

     2,175       —         18  
                        

Net cash provided by (used in) investing activities

     828       (2,972 )     (1,515 )
                        

Cash flows from financing activities

      

Transfer (to) from Parent

     3,035       (2,519 )     (2,337 )

Borrowings on long-term debt

     —         130,982       —    

Principal payments on long-term debt

     (14,189 )     (83,452 )     (1,521 )

Debt financing costs

     (225 )     (1,944 )     (143 )

Redemption and repurchase of redeemable preferred stock, Series A

     —         (54,599 )     —    
                        

Net cash used in financing activities

     (11,379 )     (11,532 )     (4,001 )
                        

Net increase in cash and cash equivalents

     —         —         —    

Cash and cash equivalents, beginning of year

     —         —         —    
                        

Cash and cash equivalents, end of year / period

   $ —       $ —       $ —    
                        

Supplemental cash flow information (Note 12)

      

 

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Notes to Financial Statements

(1) The Business

The accompanying financial statements are those of CP Media (the “Company”). The Company, a division of Herald Media Holdings, Inc., is a publisher of daily, weekly and specialty newspaper publications in Massachusetts.

(2) Summary of Significant Accounting Policies

(a) Basis of Presentation

The accompanying financial statements include the operating assets, liabilities, results of operations and cash flows of the Company as included in the historical financial statements of the Parent. The Company’s costs and expenses include allocations from the Parent for certain editorial, production, circulation, facilities, procurement, treasury, accounting, sales research and other general administrative costs (Note 13). In addition, a portion of the Parent’s redeemable preferred stock and a portion of the long-term debt with the related interest expense and allocable issuance costs have been pushed-down to these financial statements as those instruments were issued to finance the acquisition of the Company by the Parent and substantially all the assets of the Company and its stock serve as collateral for the Parent’s debt. The Parent’s net investment in the Company is shown in lieu of stockholder’s equity in these financial statements and represents the Parent’s transfer of its net investment in the Company, after giving effect to the net earnings of the Company plus net cash transfers to or from the Parent.

Management believes the assumptions used to prepare the Company’s financial statements from the historical consolidated financial statements of the Parent including methods used to allocate costs are reasonable and appropriate under the circumstances. The financial information included herein may not necessarily reflect the financial position, operating results, changes in invested equity and cash flows of the Company in the future or what they would have been had the Company been a separate, stand-alone entity during the periods presented.

(b) Fiscal Year

The Company’s fiscal year ends on the Sunday closest to June 30. The year ended June 27, 2004 comprised a 52-week period whereas the year ended July 3, 2005 comprised a 53-week period. The nine month period ended April 2, 2006 comprised a 39-week period.

(c) Revenue Recognition

Newspaper circulation revenue is recognized ratably over the subscription period. Advertising revenue is recognized at publication date, net of provisions for estimated rebates, credit and rate adjustments and discounts. Revenue derived from web site advertising is recognized ratably over the contract period. Amounts received from customers in advance of circulation or publication are recorded as deferred revenue in the balance sheets.

(d) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the fiscal year. Actual results could differ from those estimates.

 

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Notes to Financial Statements—(Continued)

 

(e) Concentration of Suppliers

The Company currently purchases substantially all of its newsprint from one supplier. The Company believes that there are numerous alternate suppliers and that any transition from one supplier to another would not cause a material disruption to the business.

(f) Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. Credit risk with respect to trade accounts receivable is limited due to the Company’s diverse customer base. Collateral is not generally required from customers. Exposure to losses on receivables is principally dependent on each customer’s financial condition. The Company closely monitors its exposure to credit losses and maintains allowances for anticipated losses.

(g) Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity date of three months or less when purchased to be cash equivalents.

(h) Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoice amount. For certain receivable balances the Company applies an interest penalty to past due balances which it recognizes as income when the interest is paid. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses on accounts receivable. The allowance is based on specific identification of probable losses and an estimate of additional losses based on historical write-off experience. Management reviews the allowance for doubtful accounts on a monthly basis. Past due balances over 90 days and over a specified dollar amount are reviewed individually for collectibility. Account balances are charged off against the allowance when it is probable the receivable will not be recovered.

(i) Inventories

Inventories consist of primarily newsprint, ink and press plates, which are stated at the lower of cost or market value and are accounted for by the first-in, first-out (FIFO) method.

(j) Advertising

The Company expenses advertising costs as they are incurred. Advertising expense for the years ended June 27, 2004 and July 3, 2005, and the nine month period ended April 2, 2006 was $1,204,000, $1,270,000 and $1,016,000, respectively, which is primarily comprised of media and agency expenses.

(k) Financial Instruments

The carrying amount of certain of the Company’s financial instruments, which include accounts receivable and accounts payable, approximate fair value due to their short-term maturities. The carrying value of long-term debt approximates fair value due to the interest rates currently available to the Company for debt with similar terms and remaining maturities.

 

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Notes to Financial Statements—(Continued)

 

(l) Property, Plant and Equipment

Property, plant and equipment are recorded at cost, net of accumulated depreciation and amortization. Expenditures for major renewals and betterments that extend the useful lives of property, plant and equipment are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are relieved and any resulting gain or loss is included in the results of operations. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset.

(m) Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but, instead, tested at least annually for impairment. Intangible assets with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the assets may not be recoverable. Intangible assets that have finite useful lives are amortized over their respective useful lives. The Company amortizes its intangible assets with finite useful lives, consisting primarily of advertiser lists and mastheads, using the straight-line method, over their estimated useful lives of 8 and 15 years, respectively.

(n) Deferred Financing Costs

Costs incurred relating to the financing of long-term debt are deferred and amortized using the effective interest and straight-line methods over the remaining life of the related debt offering. Amortization expense, which is recorded as a component of interest expense in the statements of operations, for the years ended June 27, 2004 and July 3, 2005, and the nine month period ended April 2, 2006 was $665,000, $329,000 and $237,000, respectively.

(o) Impairment of Long-Lived Assets

The Company accounts for impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.

(p) Income Taxes

Historically, the Company’s results of operations have been included in the Parent’s consolidated income tax returns. Income tax expense (benefit) reported in the Company’s statements of operations has been calculated on a separate tax return basis. However, the Parent managed its tax position for the benefit of its entire portfolio of businesses and its tax strategies are not necessarily reflective of the tax strategies that the Company would have followed or will follow as a separate stand-alone entity. Deferred tax assets related to operating losses of the Company are not presented to the extent benefits of such losses have been utilized by the Parent.

 

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Notes to Financial Statements—(Continued)

 

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and expected future tax consequences of events that have been included in the financial statements or tax returns using enacted tax rates in effect for the year in which the differences are expected to reverse. Under this method, a valuation allowance is used to offset net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the net deferred tax assets may not be realized. Management evaluates the recoverability of net deferred tax assets and the level of adequacy of the valuation allowance.

(q) Accounting for Stock-Based Compensation

Certain employees of the Company participate in the Parent’s stock option plan. The Company accounts for Parent stock-based awards to its employees using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no compensation expense is recorded for options issued to employees in fixed amounts with fixed exercise prices at least equal to the fair market value of the Parent’s common stock at the date of grant. The Company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure.

If the Company had elected to recognize compensation expense based on the minimum value of options granted at grant date as prescribed by SFAS No. 123, the Company’s net income (loss) in the years ended June 27, 2004 and July 3, 2005, and the nine month period ended April 2, 2006 would have been adjusted to the following pro forma amounts:

 

                

Nine

Months
Ended

April 2,
2006

 
     Year Ended    
     June 27,
2004
    July 3,
2005
   
     (in thousands)  

Net income (loss), as reported

   $ 6,172     $ 3,323     $ (2,998 )

Add: Stock-based compensation expense included in reported net income (loss), net of taxes

     —         —         —    

Deduct: Total stock-based compensation expense determined under minimum value method for all awards, net of taxes

     (51 )     (55 )     (34 )
                        

Pro forma net income (loss)

   $ 6,121     $ 3,268     $ (3,032 )
                        

In calculating the pro forma information set forth above, the minimum value of each grant is amortized ratably over the vesting periods and is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

Expected life (years)

   7.5  

Risk-free interest rate

   4.5 %

Dividend yield

   —    

Volatility

   —    

Because the determination of the minimum value of options granted includes vesting periods over several years, the above pro forma disclosures are not representative of pro forma effects of reported

 

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Notes to Financial Statements—(Continued)

 

results for future periods. Further, option valuation models require the input of highly subjective assumptions and were developed for use in estimating the minimum value of traded options which have no vesting restrictions and are fully transferable.

(r) Redeemable Preferred Stock

The Parent adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity on the first day of fiscal period 2006. This statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The scope of this pronouncement includes mandatorily redeemable equity instruments.

Upon adoption of SFAS No. 150, the Parent’s redeemable preferred stock was considered subject to mandatory redemption, as it is redeemable at a fixed and determinable date, and was reclassified as a long-term liability. Accretion related to the preferred instrument subsequent to the reclassification of the instrument as a liability has been reflected as interest expense. Further, related issuance costs in the amount of $1,187,000 at the date of adoption continue to be recorded as a reduction of the carrying value of the redeemable preferred stock and will be amortized through the redemption date as interest expense. The Parent has also pushed down the effects of accounting for the redeemable preferred stock under SFAS No. 150 (including its adoption) to the Company.

(s) Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123-R, Share-based Payment. SFAS No. 123-R revises SFAS No. 123 and supersedes APB No. 25. SFAS No. 123-R applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are based on the fair value of those equity instruments. Under SFAS No. 123-R, the Company will be required to follow a fair value approach using an option-pricing model, such as the Black-Scholes option pricing model, at the date of a stock option grant. This may lead to higher compensation expense than that previously presented on a pro-forma basis as the Company has historically utilized the minimum value method which does not take into account volatility. The deferred compensation amount calculated under the fair value method will then be recognized over the respective vesting period of the stock option. The Company will adopt the provisions of SFAS No. 123-R effective the first day of fiscal year 2007. As the Company is non-public, only new awards granted after that date or equity instruments outstanding as of that date which are subsequently modified, repurchased or canceled will be accounted for under the provisions of SFAS No. 123-R.

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, Accounting for Conditional Asset Retirement Obligations, which is an interpretation of SFAS No. 143, Accounting for Asset Retirement Obligations. FIN 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 47 became effective for fiscal years ending after December 15, 2005 and the Company adopted this interpretation for the nine month period ended April 2, 2006. Adopting FIN 47 did not have a material impact in the Company’s financial position, results of operations, or cash flows.

 

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Notes to Financial Statements—(Continued)

 

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109. 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 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 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 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 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. The Company is currently evaluating the impact the adoption of FIN 48 will have on its financial statements.

(3) Acquisition

In February 2005, the Company acquired the assets of Lancaster Times, Inc., which publishes the Lancaster Times and Clinton Courier, for a purchase price of $450,000 and $6,000 of acquisition-related expenses. The purchase price was allocated based upon management’s estimated fair value of the assets acquired and liabilities assumed. Amounts assigned to assets and liabilities at the acquisition date were as follows: current assets, $46,000; property, plant and equipment, $4,000; goodwill, $381,000; intangible assets, $47,000; and current liabilities, $22,000. The primary reason for this acquisition was to acquire new subscribers and to increase advertising revenue. Intangible assets acquired in this acquisition primarily consist of advertiser lists and mastheads which will be amortized using the straight-line method over an estimated weighted average useful life of eight years. Further, the goodwill generated from this acquisition will be deductible for income tax purposes.

(4) Property, Plant and Equipment

Property, plant and equipment consist of the following at July 3, 2005 and April 2, 2006:

 

     Useful Lives
in Years
   July 3,
2005
    April 2,
2006
 
          (in thousands)  

Land

      $ 2,449     $ 2,449  

Buildings and building improvements

   10-30      8,056       8,149  

Leasehold improvements

   5-10      1,535       1,563  

Machinery and equipment

   3-15      13,636       14,060  

Furniture and fixtures

   5-10      352       352  

Computer software and equipment

   3      4,367       5,055  
                   
        30,395       31,628  

Less-accumulated depreciation and amortization

        (17,634 )     (19,193 )
                   
      $ 12,761     $ 12,435  
                   

 

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Notes to Financial Statements—(Continued)

 

Depreciation and amortization expense for the years ended June 27, 2004 and July 3, 2005, and the nine month period ended April 2, 2006 was $3,438,000, $2,984,000 and $1,841,000, respectively.

(5) Intangible Assets

Intangible assets consist of the following at July 3, 2005 and April 2, 2006:

 

     Advertiser
Lists
    Mastheads     Total  
     (in thousands)  

Gross

   $ 8,860     $ 5,437     $ 14,297  

Accumulated amortization

     (4,898 )     (1,591 )     (6,489 )
                        

Net balance at July 3, 2005

   $ 3,962     $ 3,846     $ 7,808  
                        

Gross

   $ 8,860     $ 5,437     $ 14,297  

Accumulated amortization

     (5,767 )     (1,863 )     (7,630 )
                        

Net balance at April 2, 2006

   $ 3,093     $ 3,574     $ 6,667  
                        

Amortization expense relating to advertiser lists and mastheads for the years ended June 27, 2004 and July 3, 2005, and the nine month period ended April 2, 2006 was $1,448,000, $1,448,000, and $1,141,000, respectively. Based on the current balance of intangible assets subject to amortization, the estimated amortization expense in the remaining 3 month period in fiscal period 2006 and each of the succeeding five fiscal years is as follows:

 

     (in thousands)

2006

   $ 274

2007

     1,470

2008

     1,470

2009

     1,017

2010

     382

2011

     379

Thereafter

     1,675
      
   $ 6,667
      

(6) Redeemable Preferred Stock

On January 31, 2001, the Parent authorized 7,000,000 shares of preferred stock, par value $.01, and designated these shares Series A redeemable preferred stock (“Series A preferred”). On February 1, 2001, the Parent issued 6,280,000 shares of its Series A preferred at $10 per share, and incurred issuance and related costs in the amount of $2,924,000, to finance the acquisition of the Company. Accordingly, those securities, issuance costs and related subsequent activity have been pushed-down to these financial statements.

Effective July 22, 2002, the Board of Directors authorized a 10-for-1 reverse stock split of its issued and outstanding Series A preferred. All Series A preferred share amount references in the financial statements, other than historical references, have been restated to reflect this reverse stock split.

On July 22, 2004, the Parent redeemed and repurchased 362,127 shares of the Parent’s Series A preferred in consideration for an aggregate amount of $54,599,000 and 362,127 shares of the Parent’s voting common stock.

 

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Notes to Financial Statements—(Continued)

 

Voting Rights

Holders of Series A preferred are entitled to votes equal to the number of shares of voting common stock into which such holders’ shares would convert if a liquidation event were to occur. The Series A preferred shareholders are entitled to elect two directors as a class.

Liquidation Preference and Redemption

Upon the earlier of a liquidation event, as defined in the Parent’s Articles of Organization, or July 1, 2007, Series A preferred shall be automatically redeemed for (i) cash in an amount equal to a liquidation preference, and (ii) shares of voting or nonvoting common stock, as defined. The amount of cash payable per share to the holders of Series A preferred as a liquidation preference shall be equal to the original purchase price per share plus a 12% per annum accruing dividend, compounded quarterly, plus any accrued or declared but unpaid dividends, provided such amount is not prohibited by the senior debt facility. Upon payment of the liquidation preference in cash and prior to any distribution to common stockholders, each share of Series A preferred will be redeemed into voting or nonvoting common stock, as defined, by dividing $100 by the then-effective redemption price of the common stock. The redemption price of the common stock is further defined as $100. Certain terms exist to protect the conversion rights of the holders of Series A preferred in the event of future issuances of common stock or a merger or reorganization of the Parent.

Pursuant to the Parent’s Stockholders’ Agreement dated February 1, 2001, any investor owning at least 35% of Series A preferred shall have the right to initiate a sale of the Parent, commencing on January 1, 2005. In the event that a sale of the Parent is initiated, the Parent’s sole common stock shareholder shall have certain rights, as defined in the agreement, with respect to the submittal of a competing offer to purchase the Parent.

In conjunction with the Parent’s redemption and repurchase of Series A preferred on July 22, 2004, the Parent amended its Articles of Organization and Stockholders’ Agreement to extend the final date for a liquidation event with respect to Series A preferred from July 1, 2007 to January 31, 2012. Further, the Parent and its common and preferred shareholders agreed to amend and restate the Stockholders’ Agreement to change the first date upon which 35% of the holders of Series A preferred could initiate a sale of the Company from January 1, 2005 to July 1, 2006.

Dividends

Holders of Series A preferred are entitled to the same dividends that holders of common stock would have received, calculated as if such shares were converted in a liquidation event immediately prior to the record date for such dividend provided such amounts are not prohibited by the senior debt facility.

(7) Stock Incentive Plan

The Company has no separate employee stock option plan, however, employees of the Company participate in the Parent’s stock option plan. Under the provisions of the Parent’s stock option plan, stock awards are granted at the discretion of the Parent’s Board of Directors at an exercise price no less than the fair market value of the Parent’s common stock on the date of the grant and for a maximum term of ten years. Further, stock awards granted generally vest over a five-year period. Additionally, if any option expires, is terminated or canceled prior to having been exercised, the options will again be available for issuance under the plan.

At April 2, 2006, the weighted average remaining contractual life of the options outstanding was 6.8 years. Also, the weighted average grant date minimum value of options granted in the year ended June 27, 2004 was $6.22.

 

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Notes to Financial Statements—(Continued)

 

A summary of the stock option activity in the years ended June 27, 2004 and July 3, 2005, and the nine month period ended April 2, 2006, is presented below:

 

     Shares     Weighted
Average
Exercise
Price

Options outstanding, June 29, 2003

   42,500     $ 22.00

Granted

   12,000       22.00

Forfeited

   (7,000 )     22.00
            

Options outstanding, June 27, 2004

   47,500       22.00

Forfeited

   (7,500 )     22.00
            

Options outstanding, July 3, 2005

   40,000       22.00
            

Options outstanding, April 2, 2006

   40,000     $ 22.00
            

Options exercisable, June 27, 2004

   20,875     $ 22.00
            

Options exercisable, July 3, 2005

   24,000     $ 22.00
            

Options exercisable, April 2, 2006

   30,000     $ 22.00
            

(8) Senior Debt

(a) 2001 Senior Debt Facility

In connection with its acquisition of the Company in 2001 the Parent entered into a senior debt facility consisting of a $60,000,000 fully funded Term A loan, a $40,000,000 fully funded Term B loan, and a $20,000,000 revolver of which $5,000,000 was used to fund letters of credit (required by insurance carrier to cover self-insurance losses) during the term of the facility. The $100,000,000 of term loans has been pushed-down to the Company, the $5,000,000 of letters of credit were allocated to the Company based on its self-insurance loss reserve balances and the $15,000,000 revolver availability has been pushed-down to the Company. Transaction costs related to the debt in the amount of $3,700,000 were allocated to the Company based upon the allocation of the credit facility.

Under the terms of the senior debt facility the Parent is required to comply with certain financial covenants, including certain EBITDA and leverage-based ratios. Also, the terms of the senior debt facility provide for mandatory prepayments as a result of certain events or financial results, as defined in the facility. The senior debt facility is collateralized by all assets of the Parent and its subsidiaries.

Term Notes

Borrowings under Term Notes A and B are represented by separate arrangements. At the Parent’s election, interest on each Term Note is calculated at either the Lenders’ base rate or LIBOR, plus the applicable margin, which ranges from 1.5% to 4% depending upon the Parent’s total leverage ratio, as defined, and is payable monthly.

Revolving Credit and Letter of Credit Facilities

Borrowings under the revolving credit and letter of credit facility, which expires on December 31, 2006, are limited to the aggregate amount of $8,000,000, as amended in 2003. At the Parent’s election, interest on the revolving credit facility is calculated at either the Lenders’ base rate or LIBOR,

 

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CP MEDIA

Notes to Financial Statements—(Continued)

 

plus the applicable margin, which ranges from 1.5% to 3.5% depending upon the Parent’s total leverage ratio, as defined. The Parent is required to pay an unused commitment fee in the amount of 0.5% per annum on the average amount by which the revolving credit facility commitment exceeds the amount outstanding.

Under the letter of credit facility, the Parent may request the issuance of letters of credit up to $7,500,000 in aggregate. Letters of credit issued are for a period up to one year and may be extended for additional periods. The Parent is required to pay a fee in the amount of .25% plus an applicable margin per annum on outstanding letters of credit.

(b) 2004 Senior Debt Facility

In July 2004, the Parent entered into a new senior debt facility with certain financial institutions (collectively, the “Lenders”) and utilized the proceeds from this arrangement to redeem and repurchase certain of the Parent’s common and preferred stock (Note 6), settle amounts outstanding on its then existing senior debt facility and for general business purposes. The 2004 senior debt facility includes two Term Loans, a revolving credit facility and a letter of credit facility which are collateralized by all assets of the Parent. Accordingly, $131,100,000 of Term Loans and $9,500,000 of the revolving credit facility were pushed-down to the Company, and $6,000,000 of letters of credit were allocated based on the self-insurance loss reserve balances.

At the time of the refinancing, there was $83,000 and $1,378,000 of unamortized deferred financing costs relating to the existing revolving credit facility and the term notes, respectively. Also, the Parent incurred $2,127,000 of incremental financing costs which were allocated on a pro-rata basis to the new revolving credit facility and term notes based upon the total borrowing capacity. Financing costs in the amount of $267,000 and $1,677,000 relating to the revolving credit facility and term notes, respectively were pushed-down to the Company. The Company applied the provisions of EITF 98-14, Debtor’s Accounting for Changes in Line-of-Credit or Revolving Debt Arrangements and EITF 96-19, Debtor’s Accounting for Modification or Exchange of Debt Instruments to evaluate the accounting for the unamortized and new financing costs. Based upon the applicable guidance $64,000 and $148,000 of the existing unamortized deferred financing costs of the revolving credit facility and term notes, respectively, will be amortized over the remaining life of the new arrangements and the remaining balance was written-off. Also, $116,000 of the incremental financing costs associated with the term notes were written-off and the remaining balance will be deferred and amortized over the remaining life of the new arrangement. During fiscal period 2006, the Parent amended the term notes and incurred additional financing costs in the amount of $143,000 which were pushed-down to the Company.

Under the terms of the senior debt facility the Parent is required to comply with certain financial covenants, including certain EBITDA and leverage-based ratios. At July 3, 2005, the Parent was in violation of certain of these covenants prior to the Parent entering into an amendment of its senior debt facility on August 12, 2005 which, among other matters, retroactively modified certain of the covenants. Further, the senior debt facility contains cross-default provisions whereby the Parent may be deemed in default of its obligations under the facility should it default on other arrangements and obligations, as defined. The terms of the senior debt facility provide for mandatory prepayments as a result of certain events or financial results, as defined. For the year ended July 3, 2005, the Parent had excess cash flow, as defined, the outcome of which requires mandatory prepayment of principal in the amount of $612,000 in fiscal period 2006.

 

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CP MEDIA

Notes to Financial Statements—(Continued)

 

Term Loans

Borrowings under the First and Second Lien Term Loans are represented by separate arrangements. The First Lien Term Loan is in the amount of $103,376,000, which is payable over seven years based upon a defined amortization schedule, and accrues interest at LIBOR plus an applicable margin which ranges from 2.5% to 2.75% based upon the Parent’s total leverage ratio, as defined. The Second Lien Term Loan is in the amount of $18,796,000 which accrues interest at LIBOR plus the applicable margin, which ranges from 5% to 5.75% depending upon the Parent’s total leverage ratio, as defined. This loan is payable in full in January 2012. Interest on outstanding borrowings under both arrangements is payable monthly.

Revolving Credit and Letter of Credit Facilities

The revolving credit and letter of credit facility is a six-year facility and borrowings are limited to the aggregate amount of $20,192,000 less outstanding letters of credit. Interest on the revolving credit facility accrues at LIBOR plus the applicable margin, which ranges from 2.25% to 3.0%, depending upon the Parent’s total leverage ratio, as defined, and is payable monthly. The Parent is required to pay an unused commitment fee in the amount of .50% per annum on the average amount by which the revolving credit facility commitment exceeds the amount outstanding. At April 2, 2006, amounts available under the revolving credit and letter of credit facility were $18,831,000.

Under the letter of credit facility, the Parent may request the issuance of letters of credit up to $10,000,000 in aggregate. Letters of credit issued are for a period up to one year and may be extended for additional periods. The Parent is required to pay a fee in the amount of .50% plus an applicable margin per annum on outstanding letters of credit. At April 2, 2006, there was $1,110,000 in outstanding letters of credit as required by existing self-insurance arrangements.

Incremental Facilities

Subject to the terms and conditions of the senior debt facility, the Parent may incur additional indebtedness through July 22, 2007 in the form of one or more additional First Lien Term Loans up to an aggregate amount of $40,000,000. Indebtedness under this arrangement will be for a minimum principal amount of $10,000,000, will have the same repayment amortization schedule as the then outstanding First Lien Term Loans and is required to be used for permitted acquisitions, purchases of property, plant and equipment and the redemption of the outstanding preferred stock, as defined in the senior debt facility. The interest rate margin applicable to these borrowings will be determined at the time of the borrowing provided that, if the interest rate margin with respect to the new borrowings is more than .50% higher than the interest rate margin on the existing First Lien Term Loans, then the First Lien Term Loans’ margin shall be reduced to be .50% less than the interest rate margin on the new borrowings. As of April 2, 2006, the Parent has not incurred indebtedness under this arrangement.

 

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CP MEDIA

Notes to Financial Statements—(Continued)

 

Long-term debt is summarized as follows at July 3, 2005 and April 2, 2006:

 

      July 3,
2005
    April 2,
2006
 
     (in thousands)  

First Lien Term Note, at LIBOR plus applicable margin (6.0% and 7.7% at July 3, 2005 and April 2, 2006, respectively); quarterly principal payments of $258, due September 24, 2004 through April 11, 2011, with a balloon payment of $95,386 due on July 22, 2011

   $ 102,250     $ 101,417  

Second Lien Term Note, at LIBOR plus applicable margin (9.0% and 10.7% at July 3, 2005 and April 2, 2006, respectively); payable in full on January 22, 2012

     18,779       18,779  

Revolving Credit Facility, at LIBOR plus applicable margin (6.3% and 7.9% at July 3, 2005 and April 2, 2006, respectively); payable in full on July 22, 2010

     939       251  
                
     121,968       120,447  

Less—current portion

     (1,033 )     (975 )
                
   $ 120,935     $ 119,472  
                

The aggregate principal maturities are as follows in fiscal years:

 

     (in thousands)

2007

   $ 975

2008

     1,033

2009

     1,033

2010

     1,033

2011

     1,033

Thereafter

     115,340
      
   $ 120,447
      

(9) Commitments and Contingencies

(a) Operating Leases

The Company leases facilities under noncancelable operating leases that expire through December 2010. In addition to lease payments on certain facilities, the Company is required to pay the applicable property taxes and operating costs. Rent expense is calculated on a straight-line basis for a lease on a facility due to escalations in minimum lease payments. Accordingly, at July 3, 2005 and April 2, 2006 there is a deferred liability of $502,000 and $434,000, respectively, included in accounts payable and accrued expenses and other long-term liabilities in the balance sheets that represents the excess of rent expense calculated on a straight-line basis over rent payments made.

In the years ended June 29, 2003, July 3, 2005 and the nine month period ended April 2, 2006, the Company entered into certain agreements to sublease portions of its main leased administrative facility. In accordance with the provisions of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company recorded a liability in connection with the Company ceasing use of the rights conveyed under the lease agreement on the facility. The liability represents the value of the excess of the Company’s pro rata future minimum lease expense over scheduled sublease payments

 

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CP MEDIA

Notes to Financial Statements—(Continued)

 

in addition to improvement allowances provided to the sublesee which were expended in the nine month period ended April 2, 2006. The aggregate expense recorded in the years ended June 29, 2003, July 3, 2005 and the nine month period ended April 2, 2006 relating to these agreements was $263,000, $670,000 and $259,000, respectively. The expense related to this liability is included in general and administrative expenses in the statements of operations. The liability is included in accrued expenses and long-term liabilities in the balance sheets.

Activity relating to these agreements was as follows in the years ended June 27, 2004, July 3, 2005 and the nine month period ended April 2, 2006:

 

     (in thousands)  

Balance at June 27, 2004

   $ 90  

Costs incurred

     670  

Cash payments

     (30 )

Non-cash adjustments

     9  
        

Balance at July 3, 2005 (of which $418 is short-term)

     739  

Costs incurred

     259  

Cash payments

     (574 )

Non-cash adjustments

     11  
        

Balance at April 2, 2006 (of which $83 is short-term)

   $ 435  
        

In the year ended June 27, 2004, the Company completed a sale/leaseback transaction involving certain real estate facilities. The sales price of $1,300,000 resulted in a net gain after closing costs of $556,000, of which $260,000 was deferred and is being amortized on a straight-line basis over the five-year lease period.

Future minimum lease payments under noncancelable leases, excluding sublease arrangements, are as follows in the remaining three month period in fiscal year 2006 and each succeeding fiscal year. Aggregate minimum lease payments under sublease agreements are $776,000 per annum through December 2010.

 

     (in thousands)

2006

   $ 477

2007

     1,882

2008

     1,903

2009

     1,796

2010

     1,662

2011

     827
      
   $ 8,547
      

Rent expense, net of sublease income, in the years ended June 27, 2004 and July 3, 2005, and in the nine month period ended April 2, 2006, was $1,758,000, $2,589,000 and $1,516,000, respectively. Sublease income was $230,000, $304,000, and $395,000, in the years ended June 27, 2004, July 3, 2005 and the nine month period ended April 2, 2006, respectively.

 

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CP MEDIA

Notes to Financial Statements—(Continued)

 

(b) Litigation

The Company is party to certain claims and litigation involving matters incidental to its operations. Management does not expect the outcome of these matters to have a material effect on the Company’s financial position, results of operations or cash flows.

(10) Employee Benefit Plan

The Company sponsors a qualified defined contribution plan with a 401(k) deferred compensation provision which covers all eligible employees. The Company’s matching contribution is discretionary. The Company did not make discretionary matching contributions in the years ended June 27, 2004 and July 3, 2005, and made a contribution of $46,000 in the nine month period ended April 2, 2006.

(11) Income Taxes

The components of the provision for income taxes in the years ended June 27, 2004 and July 3, 2005, and in the nine month period ended April 2, 2006 are as follows:

 

      Year Ended    Nine
Months
Ended
April 2,
2006
      June 27,
2004
   July 3,
2005
  
     (in thousands)

Current tax expense

        

Federal

   $ 62    $ —      $ —  

State

     —        —        —  
                    

Total current tax expense

   $ 62    $ —      $ —  
                    

Deferred tax expense

        

Federal

   $ 2,327    $ 2,331    $ 1,752

State

     676      676      508
                    

Total deferred tax expense

   $ 3,003    $ 3,007    $ 2,260
                    

Total provision for income taxes

   $ 3,065    $ 3,007    $ 2,260
                    

The differences between income taxes at the statutory federal income tax rate of 34% and the provision for the years ended June 27, 2004 and July 3, 2005, and the nine month period ended April 2, 2006 are as follows:

 

     Year Ended   

Nine

Months

Ended

April 2,
2006

 
     June 27,
2004
    July 3,
2005
  
     (in thousands)  

Tax at federal statutory rate

   $ 3,140     $ 2,152    $ (250 )

State income taxes, net of federal benefit

     579       397      223  

Non-deductible redeemable preferred stock expense

     —         —        1,458  

Other, net

     126       35      (31 )

Change in valuation allowance

     (780 )     423      860  
                       

Provision for income taxes

   $ 3,065     $ 3,007    $ 2,260  
                       

 

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CP MEDIA

Notes to Financial Statements—(Continued)

 

The significant components of the Company’s deferred tax assets and liabilities at July 3, 2005 and April 2, 2006, are as follows:

 

      July 3,
2005
    April 2,
2006
 
     (in thousands)  

Deferred tax assets

    

Depreciation and amortization

   $ 2,137     $ 2,372  

State tax credits and state and federal loss carryforward

     1,877       2,708  

Self-insurance accrual

     229       198  

Allowance for doubtful accounts

     612       650  

Deferred rent and lease exit costs

     559       411  

Other

     108       43  
                

Gross deferred tax assets

     5,522       6,382  

Less—valuation allowance

     (5,522 )     (6,382 )
                

Total deferred tax assets

     —         —    
                

Deferred tax liabilities

    

Goodwill amortization

     9,283       11,543  
                

Gross deferred tax liabilities

     9,283       11,543  
                

Net deferred tax liability

   $ (9,283 )   $ (11,543 )
                

A valuation allowance has been provided against the Company’s deferred tax asset, excluding the deferred tax liability associated with the amortization of goodwill for income tax purposes, as it is more likely than not that this deferred tax asset will not be realized based upon the Company’s historical and forecasted taxable income.

At April 2, 2006, the Company had $5,884,000 of operating loss carryforwards in The Commonwealth of Massachusetts and for federal purposes which begin to expire in 2007 and 2023, respectively. Also, at April 2, 2006 the Company had $73,000 in alternative minimum tax credit carryforwards which do not expire. Further, at April 2, 2006 the Company had $268,000 in investment tax credit carryfowards, a majority of which have an indefinite life, in The Commonwealth of Massachusetts available to reduce future income and state excise taxes. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income.

The Company is subject to routine audits by federal and state taxing authorities that may result in proposed assessments by the tax authorities. The Company believes that its tax positions comply with applicable tax law and has not accrued any liability resulting from such potential assessments and claims exposure.

 

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CP MEDIA

Notes to Financial Statements—(Continued)

 

(12) Supplemental Cash Flow Information

Supplemental disclosures of cash flow information in the years ended June 27, 2004 and July 3, 2005, and in the nine month period ended April 2, 2006 are as follows:

 

     Year Ended   

Nine Months

Ended

April 2,

2006

      June 27,
2004
   July 3,
2005
  
     (in thousands)

Noncash investing and financing activities

        

Accretion of Series A redeemable preferred stock and issuance costs

   $ 10,939    $ 5,631    $ —  

Acquisitions

        

Fair value of assets acquired

     —        97      —  

Fair value of liabilities assumed

     —        22      —  

(13) Related Party Transactions

(a) Related Party Revenue and Related Costs

The Company’s revenues include allocations from the Parent for sales of primarily online advertising and other miscellaneous items. These allocations have been determined on bases that the Company and the Parent considered to be a reasonable reflection of the utilization of services provided or the benefit received by the Company. The allocation methods include primarily number of line and banner ads and hosting fees. Allocated revenues and related costs included in general and administrative expenses in the statements of operations were as follows for the years ended June 27, 2004 and July 3, 2005, and the nine month period ended April 2, 2006:

 

     Year Ended   

Nine Months
Ended

April 2,

2006

      June 27,
2004
   July 3,
2005
  
     (in thousands)

Online and other revenue—related party

   $ 625    $ 1,055    $ 895

Related costs

     556      722      616

(b) Parent Allocations

The Company’s costs and expenses include allocations from the Parent for certain editorial, production, circulation, facilities, procurement, treasury, accounting, sales research and other general administrative costs. These allocations have been determined on bases that the Company and the Parent considered to be a reasonable reflection of the utilization of services provided or the benefit received by the Company. The allocation methods include number of copies, relative sales, headcount, salaries, square footage and usage. Allocated costs included in the statements of operations were as follows for the years ended June 27, 2004 and July 3, 2005, and the nine month period ended April 2, 2006:

 

     Year Ended   

Nine Months
Ended
April 2,

2006

     June 27,
2004
   July 3,
2005
  
     (in thousands)

Editorial

   $ 73    $ 55    $ —  

Production

     64      93      113

Circulation

     142      142      107

General and administrative

     38      35      5
                    
   $ 317    $ 325    $ 225
                    

 

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CP MEDIA

Notes to Financial Statements—(Continued)

 

(14) Subsequent Event

On June 6, 2006, the Parent entered into an asset purchase agreement with Gatehouse Media, Inc. (“Gatehouse”) whereby Gatehouse purchased substantially all of the assets and assumed certain liabilities of the Parent’s community newspaper publishing operations for $230,000,000 in addition to $353,000 relating to a working capital adjustment. The Parent subsequently used a portion of the sale proceeds to pay all outstanding indebtedness in full.

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Enterprise NewsMedia, Inc.

In our opinion, the accompanying consolidated statements of operations, of cash flows and of shareholders’ deficit, member’s interest and comprehensive income (loss) present fairly, in all material respects, the results of operations of Enterprise NewsMedia, Inc. and subsidiaries and their cash flows and changes in equity for the period from January 1, 2003 through March 31, 2003 (Predecessor period) in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

New York, New York

July 20, 2006

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Member of

Enterprise NewsMedia, LLC:

In our opinion, the accompanying consolidated statements of operations, of cash flows and of shareholders’ deficit, member’s interest and comprehensive income(loss) present fairly, in all material respects, the results of operations of Enterprise NewsMedia, LLC and subsidiaries and their cash flows and changes in equity for the period from April 1, 2003 through December 31, 2003 (Successor period) in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, on April 1, 2003 the Company affected a series of integrated transactions resulting in a change of control which was accounted for as a purchase business combination. As a result of these transactions, the consolidated financial information for the Successor period is presented on a different cost basis than the Predecessor period and, therefore, the two periods are not comparable.

/s/ PricewaterhouseCoopers LLP

New York, New York

July 20, 2006

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Member of

Enterprise NewsMedia, LLC

We have audited the accompanying consolidated balance sheets of Enterprise NewsMedia, LLC (a Delaware limited liability company) and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, member’s interest and comprehensive income (loss) and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Enterprise NewsMedia, LLC and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Boston, Massachusetts

July 20, 2006

 

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ENTERPRISE NEWSMEDIA, LLC

Consolidated Balance Sheets

December 31, 2004 and 2005

(dollar amounts in thousands)

 

     2004    2005
     (Successor)    (Successor)
ASSETS      

CURRENT ASSETS

     

Cash and cash equivalents

   $ 6,182    $ 3,921

Trade receivables, net of allowance for doubtful accounts of $400 and $440 respectively

     6,850      7,593

Inventories

     713      1,046

Prepaid expenses and other current assets

     1,246      911
             

Total current assets

     14,991      13,471
             

PROPERTY, PLANT AND EQUIPMENT—NET

     17,574      22,379

OTHER ASSETS

     

Goodwill

     74,659      74,774

Other intangible assets—net

     65,451      62,090

Other assets

     2,516      2,293
             

Total assets

   $ 175,191    $ 175,007
             
LIABILITIES AND MEMBERS’ INTEREST      

CURRENT LIABILITIES

     

Accounts payable

   $ 3,032    $ 3,431

Accrued expenses

     3,787      3,193

Current portion—long-term debt

     7,282      893

Current portion—noncompete and consulting agreements

     500      500

Deferred revenue

     2,259      2,025

Revolving credit loan

     —        6,500
             

Total current liabilities

     16,860      16,542
             

LONG-TERM LIABILITIES

     

Long-term debt, net of current portion

     61,699      78,381

Pension and other post-retirement benefit obligations

     14,985      15,752

Noncompete and consulting agreements, net of current portion

     500      —  

Other liabilities

     —        368
             

Total liabilities

     94,044      111,043
             

Commitments and Contingencies

     

MEMBER’S INTEREST

     81,147      63,964
             

Total liabilities and members’ interest

   $ 175,191    $ 175,007
             

The accompanying notes are an integral part of these consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Consolidated Statements of Operations

For the period from January 1, 2003 through March 31, 2003 (Predecessor Period), the period from April 1, 2003 through December 31, 2003 (Successor Period) and the years ended

December 31, 2004 and 2005 (Successor Periods)

(dollar amounts in thousands)

 

    

Period from

January 1,

2003 to

March 31,

2003

   

Period from

April 1,

2003 to

December 31,

2003

    Years ended
December 31,
 
         2004     2005  
     (Predecessor)     (Successor)     (Successor)     (Successor)  

Revenues:

          

Advertising

   $ 11,773        $ 40,625     $ 54,757     $ 57,135  

Circulation

     5,197       15,787       22,064       21,406  

Commercial printing and other

     86       258       435       438  
                                

Total revenues

     17,056       56,670       77,256       78,979  
                                

Operating costs and expenses:

          

Production

     5,604       17,605       23,979       24,830  

Selling, general and administrative

     10,681       29,050       40,839       40,721  

Depreciation and amortization

     1,879       6,179       7,152       6,375  
                                

Total operating expenses

     18,164       52,834       71,970       71,926  
                                

(Loss) income from operations

     (1,108 )     3,836       5,286       7,053  
                                
 

Other income (expenses):

          

Interest expense

     (3,864 )     (3,220 )     (4,564 )     (5,319 )

Interest income

     1       3       3       15  

Write-off of deferred financing costs upon extinguishment of debt

     —         —         —         (2,025 )

Equity in earnings (losses) of equity investee

     63       23       (536 )     —    

Other

     (245 )     23       182       201  
                                

Total other income (expenses)

     (4,045 )     (3,171 )     (4,915 )     (7,128 )
                                

Net (loss) income

   $ (5,153 )   $ 665     $ 371     $ (75 )
                                

The accompanying notes are an integral part of these consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Consolidated Statements of Cash Flows

For the period from January 1, 2003 through March 31, 2003 (Predecessor Period), the period from April 1, 2003 through December 31, 2003 (Successor Period) and the years ended

December 31, 2004 and 2005 (Successor Periods)

(dollar amounts in thousands)

 

    

Period from
January 1,
2003
to March 31,

2003

   

Period from
April 1, 2003
to December 31,

2003

    Years ended
December 31,
 
         2004     2005  
     (Predecessor)     (Successor)     (Successor)     (Successor)  

Cash flows from operating activities:

          

Net (loss) income

   $ (5,153 )   $ 665     $ 371     $ (75 )

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

          

Depreciation and amortization

     1,879       6,179       7,152       6,375  

Subordinated debt and warrant interest

     1,916       15       —         —    

Non cash compensation

     —         9       12       12  

Amortization of deferred financing costs

     164       311       445       233  

Write-off of deferred financing costs upon extinguishment of debt

     —         —         —         2,025  

Gain on the sale of property, plant and equipment

     —         (8 )     —         (7 )

Equity in earnings (losses) of equity investee, net of distributions

     (63 )     162       536       —    

Changes in operating assets and liabilities, net of acquisitions:

          

Trade receivables

     682       41       (751 )     (743 )

Inventories

     61       (506 )     308       (333 )

Prepaid expenses and other current assets

     (135 )         (158 )     (200 )     335  

Other assets

     —         11       —         (97 )

Accounts payable and accrued expenses

     3,124       (2,378 )     1,025       (195 )

Deferred revenue

     100       124       (420 )     (234 )

Pension and other liabilities

     310       205       949       1,135  
                                

Net cash provided by operating activities

     2,885       4,672       9,427       8,431  
                                

Cash flows from investing activities:

          

Deferred acquisition payments

     (237 )     (375 )     (500 )     (500 )

Acquisition of Norwood, net of cash acquired

     —         —         —         (587 )

Acquisition of Call, net of cash acquired

     —         —         —         (262 )

Proceeds from sale of property, plant, and equipment

     —         39       32       24  

Purchase of manufacturing facility by an agent

     —         —         —         (5,582 )

Purchase of property, plant, and equipment

     (66 )     (1,995 )     (741 )     (1,296 )
                                

Net cash used in investing activities

     (303 )     (2,331 )     (1,209 )     (8,203 )
                                

Cash flows from financing activities:

          

Member contributions

     —         44,170       5       —    

Distribution to member

     —         (50 )     (1,910 )     (17,481 )

Repayments of long-term debt

     —         (109,212 )     (3,445 )     (69,432 )

Proceeds from long-term debt

     —         70,000       —         79,500  

Proceeds from revolving line of credit

     —         —         —         6,500  

Deferred financing costs

     (405 )     (4,017 )     (321 )     (1,576 )
                                

Net cash (used in) provided by financing activities

     (405 )     891       (5,671 )     (2,489 )
                                

Net increase (decrease) in cash and cash equivalents

     2,177       3,232       2,547       (2,261 )

Cash and cash equivalents at the beginning of the period

     1,226       403       3,635       6,182  
                                

Cash and cash equivalents at the end of the period

   $ 3,403     $ 3,635     $ 6,182     $ 3,921  
                                

The accompanying notes are an integral part of these consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Consolidated Statements of Cash Flows—Continued

For the period from January 1, 2003 through March 31, 2003 (Predecessor Period), the period from April 1, 2003 through December 31, 2003 (Successor Period) and the years ended

December 31, 2004 and 2005 (Successor Periods)

(dollar amounts in thousands)

 

    

Period from
January 1,
2003
to March 31,

2003

  

Period from
April 1, 2003
to December 31,

2003

   Years ended
December 31,
           2004    2005
     (Predecessor)    (Successor)    (Successor)    (Successor)

Supplementary disclosures of cash flow information

           

Cash paid for interest

   $ 553    $ 3,221    $ 4,043    $ 5,159

Non-Cash Activity

In connection with the acquisition of SCP 2002E-31 LLC as discussed in Note 1, the Company assumed an existing mortgage of $4,426 and property of $4,946 which were recorded as increases to the mortgage obligation and property, plant and equipment during the period from April 1, 2003 to December 31, 2003.

In connection with the 2005 acquisition of Call as discussed in Note 3, the Company financed $225 of the acquisition price with a note payable to the former owners.

The Company owns real estate in Chicopee, Massachusetts that is leased to an independent third party. The lease calls for the tenant to pay the lease payments directly to the Company’s mortgage lender. The lease payments paid by the tenant directly to the mortgage lender were $194 in both 2005 and 2004.

 

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ENTERPRISE NEWSMEDIA, LLC

Consolidated Statements of Shareholders’ Deficit, Member’s Interest

and Comprehensive Income (Loss)

For the period from January 1, 2003 through March 31, 2003 (Predecessor Period), the period from April 1, 2003 through December 31, 2003 (Successor Period) and the years ended

December 31, 2004 and 2005 (Successor Periods)

(dollar amounts in thousands)

 

   

Number

of

Shares

 

Common

Class A

 

Additional

Paid in

Capital

 

Accumulated

Other

Comprehensive

Income (Loss)

   

Accumulated

Distributions

   

Accumulated

Deficit

    Total    

Total

Comprehensive

Income (Loss)

 

Balance at December 31, 2002

  485   $ 485   $ 290   $ (1,129 )   $ (1,733 )   $ (55,746 )   $ (57,833 )   $    

Amortization of cash flow hedge

      —       —       101       —         —         101       101  

Net loss from January 1, 2003 through March 31, 2003

      —       —       —         —         (5,153 )     (5,153 )     (5,153 )
                                                       

Balance at March 31, 2003

  485   $ 485   $ 290   $ (1,028 )   $ (1,733 )   $ (60,899 )   $ (62,885 )  
                                                 

Total comprehensive loss

                $ (5,052 )
                     

The accompanying notes are an integral part of these consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Consolidated Statements of Shareholders’ Deficit, Member’s Interest

and Comprehensive Income (Loss)

For the period from January 1, 2003 through March 31, 2003 (Predecessor Period), the period from April 1, 2003 through December 31, 2003 (Successor Period) and the years ended

December 31, 2004 and 2005 (Successor Periods)

(dollar amounts in thousands)

 

    Member’s
Interest
    Accumulated
Other
Comprehensive
Income (Loss)
    Unearned
Compensation
    Total     Total
Comprehensive
Income (Loss)
 

Balance at April 1, 2003

  $ 81,246     $ —       $ —       $ 81,246     $    

Member contributions

    499       —         —         499    

Unearned compensation

    80       —         (80 )     —      

Amortization of unearned compensation

    —         —         9       9    

Unrealized loss on cash flow hedge

    —         (173 )     —         (173 )     (173 )

Distributions

    (50 )     —         —         (50 )  

Net income

    665       —         —         665       665  
                                       

Balance at December 31, 2003

    82,440       (173 )     (71 )     82,196    
                                 

Total Comprehensive Income

          $ 492  
               

Member contributions

    5       —         —         5    

Amortization of unearned compensation

    —         —         12       12    

Unrealized gain on cash flow hedge

    —         473       —         473       473  

Distributions

    (1,910 )     —         —         (1,910 )  

Net income

    371       —         —         371       371  
                                       

Balance at December 31, 2004

  $ 80,906     $ 300     $ (59 )   $ 81,147    
                                 

Total Comprehensive Income

          $ 844  
               

The accompanying notes are an integral part of these consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Consolidated Statements of Shareholders’ Deficit, Member’s Interest

and Comprehensive Income (Loss)

For the period from January 1, 2003 through March 31, 2003 (Predecessor Period), the period from April 1, 2003 through December 31, 2003 (Successor Period) and the years ended

December 31, 2004 and 2005 (Successor Periods)

(dollar amounts in thousands)

 

    Member’s
Interest
    Accumulated
Other
Comprehensive
Income (Loss)
  Unearned
Compensation
    Total     Total
Comprehensive
Income (Loss)
 

Balance at December 31, 2004

  $ 80,906     $ 300   $ (59 )   $ 81,147     $    

Amortization of unearned compensation

    —         —       12       12    

Unrealized gain on cash flow hedge

    —         362     —         362       362  

Distributions

    (17,482 )     —       —         (17,482 )  

Net (loss) income

    (75 )     —       —         (75 )     (75 )
                                     

Balance at December 31, 2005

  $ 63,349     $ 662   $ (47 )   $ 63,964    
                               

Total Comprehensive Income

          $ 287  
               

The accompanying notes are an integral part of these consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(1) Organization, Nature of Operations and Basis of Presentation

(a) Organization

Enterprise NewsMedia, Inc. (“ENM Inc.”) was formed on January 6, 1997 for the purpose of acquiring privately owned local community newspapers. On January 6, 1997, ENM Inc. acquired Enterprise Publishing Company (“EPC”). On February 4, 1998, ENM Inc. acquired George W. Prescott Publishing Company (“GWP”), Memorial Press Group (“MPG”) and Low Realty Inc. (“LRI”).

On April 1, 2003, ENM, Inc. affected a series of integrated transactions through which there was a change in control and a change in the entity through which the business operated from an S Corporation to a Delaware limited liability company, Enterprise NewsMedia, LLC (“ENM LLC”). Refer to the Sale Transaction section below for further discussion of the change in control and related change in basis.

ENM LLC (the “Company”), a Delaware limited liability company and a wholly-owned subsidiary of Enterprise NewsMedia Holding, LLC, was established for the purpose of completing the Sale Transaction and is the successor Company.

(b) Principles of Consolidation, Nature of Operations and Basis of Presentation

The consolidated financial statements include the accounts of ENM LLC and its subsidiaries and are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. All significant intercompany transactions and balances have been eliminated in consolidation. The Company operates in a single business segment as its enterprises have similar economic characteristics, products, customers and distribution. The following is a summary of the consolidated subsidiaries:

EPC, headquartered in Brockton, Massachusetts, was founded in 1880 and publishes the Brockton Enterprise, a leading daily newspaper serving 28 communities in three Massachusetts counties.

GWP, headquartered in Quincy, Massachusetts, was founded in 1848 and publishes the Patriot Ledger, a six-day daily newspaper serving 26 communities in southeastern Massachusetts.

LRI owns a portion of the real estate used by MPG and GWP.

MPG, headquartered in Plymouth, Massachusetts, publishes the Old Colony Memorial and several weekly publications distributed on Massachusetts’ South Shore. MPG also performs contract printing for affiliated and independent customers. On January 28, 2005, MPG acquired certain assets of The Call Group (“Call Acquisition”) and certain assets of the Norwood Bulletin (“Norwood Acquisition”). The Call Acquisition consisted of three weekly community newspapers, The Taunton Call, The Raynham Call, and The Lakeville Call. The Norwood Acquisition included The Norwood Bulletin, a weekly publication. As of December 31, 2005, MPG owned and operated 13 weekly newspapers.

Enterprise NewsMedia Chicopee LLC was established to acquire SCP 2002E-31 LLC (“SCP”). SCP is a special purpose entity that owns property (land and a building) located in Chicopee, Massachusetts. SCP is party to a triple net lease agreement whereby a tenant leases the building for monthly fixed rent equal to SCP’s monthly mortgage payment. The tenant is also liable for all operating expenses of the property, including, but not limited to, all real estate taxes and assessments,

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

insurance, utilities, repairs and maintenance. In accordance with Statement of Financial Accounting Standards “SFAS” No. 13, “Accounting for Leases”, the triple net lease is classified and accounted for as an operating lease.

(c) Sale Transaction

As part of a change in control transaction, on April 1, 2003, ENM, Inc. contributed the preponderance of its assets, liabilities and related contractual arrangements (through a holding company) to the newly formed ENM LLC. Assets and liabilities retained by ENM, Inc. consisted of $3,000 in cash, investments and junior subordinated debt of $18,091 and accrued management fees of $9,875, respectively. All other assets, liabilities, operations and contractual arrangements were contributed to ENM LLC as part of the change in control transaction.

The change in control was accounted for as a purchase with a full step up to fair market value in accordance with SFAS No. 141, “Business Combinations,” resulting in a new basis of accounting subsequent to the Sale Transaction. For presentation herein, the financial statements up to the date of the sale are denoted as having been prepared under the Predecessor basis, while the financial statements prepared subsequent to the Transaction are denoted as having been prepared under the Successor basis.

The purchase price was allocated to the acquired assets and liabilities based on their fair values at April 1, 2003 as determined by third-party appraisals and management estimates. The following is a summary of the opening balance sheet under the successor basis of accounting reflecting the fair values of the assets acquired and liabilities assumed, prior to the refinancing, as of the date of the Sale Transaction.

 

     April 1, 2003

Current assets

   $ 51,716

Property

     7,761

Equipment

     8,760

Other assets

     3,193

Advertising accounts

     45,849

Subscriber lists

     20,114

Mastheads

     6,083

Noncompete agreements

     625

Goodwill

     74,659
      

Total assets acquired

     218,760
      

Current liabilities

     10,163

Deferred revenue

     2,553

Long-term debt

     108,509

Other liabilities

     16,289
      

Total liabilities assumed

     137,514
      

Net assets acquired

   $ 81,246
      

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

In connection with the reorganization and sale of membership interests on April 1, 2003, all previous outstanding debt related obligations were refinanced.

Of the intangibles acquired, the advertising accounts have an estimated useful life of 18 years, the subscriber lists have an estimated useful life of 14 - 16 years, the noncompete agreements have a term of 4 years and the mastheads are deemed to have an indefinite life.

(2) Summary of Significant Accounting Policies

Significant accounting policies followed in the preparation of the consolidated financial statements are as follows:

(a) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowances for doubtful accounts, reserves for sales returns and allowances, pension and post-retirement liabilities, useful lives of tangible and intangible assets, inventory valuation and the recoverability of long-lived assets, including the excess of purchase price over net assets acquired. The Company bases its estimates on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. These form the basis of the Company’s judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates which would affect the Company’s reported results of operations.

(b) Cash Equivalents

The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Included in cash and cash equivalents is $2,093 and $1,828 which is held in an overnight sweep at December 31, 2005 and 2004.

(c) Accounts Receivable

Accounts receivable relate to sales for which credit is extended based on the customer’s credit history. Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts and allowances. The Company determines its allowance by considering the length of time trade accounts receivable are past due, the Company’s previous loss history and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company does not accrue interest on past due accounts.

(d) Concentrations of Credit Risks

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and trade receivables. The Company places its cash deposits with a single financial institution. Accounts receivables are due from customers primarily located in the immediate area of publication. No single customer accounted for more than 10% of revenue or accounts receivable in any period presented.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

(e) Revenue Recognition

The Company recognizes revenue from the sales of advertising space in published issues of its newspapers and on interactive websites owned by, or affiliated with, the Company as well as from sales of newspapers to distributors and individual subscribers. Newspaper advertising revenue is recorded when advertisements are published in newspapers. Website advertising revenue is recognized ratably over the contract period or as services are delivered, as appropriate.

Proceeds from newspaper subscriptions are deferred and are recognized in revenue ratably over the term of the subscriptions. Revenue is recorded net of estimated incentive offerings, including special pricing agreements, promotions and other volume-based incentives. Revisions to these estimates are charged to income in the period in which the facts for the revision become known.

(f) Inventories

Inventories, consisting primarily of newsprint, are stated at the lower of cost, determined pursuant to the first in, first out value method (FIFO), or market.

(g) Advertising

The Company’s policy is to expense all advertising costs as incurred. Advertising expense for all periods presented was de minimis.

(h) Property, Plant and Equipment

Property, plant and equipment are stated at cost, or when acquired in connection with a business acquisition, at the fair market value at time of acquisition based on independent appraisals. Fair value is generally determined based on estimated future cash flows of the related assets and gains and losses are recognized as incurred. Depreciation is computed using the straight line method over the estimated useful lives of the assets, which are as follows:

 

Buildings and improvements

   40 years

Furniture, fixtures and equipment

   5-10 years

Leasehold improvements

   Shorter of life of lease or asset

Vehicles

   3-5 years

Computer hardware

   5 years

Computer software

   3-5 years

(i) Identifiable Intangible Assets and Goodwill

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), goodwill and intangible assets with indefinite lives are tested for impairment in December of each year, or when events indicate that an impairment could exist. As required by SFAS 142, in the Company’s impairment test of goodwill, the Company annually compares the fair value of the applicable reporting unit to its carrying value. If the carrying value of the reporting unit exceeds the estimate of fair value, the Company calculates the impairment as the excess of the carrying value of goodwill over its implied fair value. No impairment charge resulted from these tests during the period from January 1, 2003 to March 31, 2003, the period from April 1, 2003 to December 31, 2003, or the years ended December 31, 2004 and 2005.

Intangible assets that are determined to have definite lives are amortized over their useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. See Note 5 for the components of the Company’s intangible assets.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

Noncompete and consulting agreements are recorded at acquisition cost and are amortized over the period of benefit using the straight-line method, usually ten years or less. Other intangible assets include acquired trademarks, subscriber lists, and advertising accounts. Amortization of intangible assets is computed using the straight-line method over the following estimated useful lives of the assets, which are as follows:

 

Trademarks—finite-lived

   15 years

Subscriber lists

   6-16 years

Advertising accounts

   12-18 years

Noncompete and consulting agreements

   2-4 years

(j) Financial Instruments

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximated fair value at December 31, 2004 and 2005 because of the relatively short maturity of these instruments. The carrying value of short-term and long-term debt approximates fair value at December 31, 2004 and 2005.

(k) Deferred Financing Costs

Deferred financing costs arising in connection with borrowings under credit agreements have been capitalized and are amortized using the effective interest method over the term of their respective debt issues. If a debt issue is extinguished, any unamortized deferred financing fees are expensed at the time of extinguishment.

(l) Income Taxes

As an LLC, the Company is treated as a partnership for federal and state income tax purposes and therefore is generally not subject to income tax. Instead, the LLC members are taxed on their allocable share of the Company income.

For the period from January 1, 2003 through March 31, 2003, the entity operated as an S Corporation conducting business in Massachusetts. EPC, GWP, MPG, LRT and LRI were Qualifying Subchapter S Subsidiaries (“QSSS”) in accordance with Internal Revenue Code Section 1361(b)(3) and were generally not subject to corporate-level taxes. For federal reporting purposes, the subsidiaries were deemed to have liquidated into the Company and as a result all entities reported on a combined basis for federal income tax purposes.

(m) Accounting for Derivatives and Hedging Activities

The Company is a limited user of derivative financial instruments to manage risks generally associated with interest rate volatility. The Company does not hold or issue derivative financial instruments for trading purposes. All derivative instruments are recorded on the consolidated balance sheets at fair value. Changes in the fair value of derivatives that are designated and qualify as effective hedges are recorded either in accumulated other comprehensive income (loss) or through earnings, as appropriate. The ineffective portion of derivatives that are classified as hedges is immediately recognized in net earnings (loss). The Company does not hold derivatives that are not classified as hedges.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

(n) Comprehensive Income (Loss)

Comprehensive income (loss), which is reported on the accompanying Consolidated Statements of Shareholders’ Deficit, Members’ Interest and Comprehensive Income (Loss) as a component of accumulated other comprehensive loss, consists of net income (loss) and other gains and losses affecting shareholders’ deficit and members’ interest that, under accounting principles generally accepted in the United States of America, are excluded from net income (loss). The only such item was the change in certain derivative financial instruments.

(o) Long-Lived Assets

The Company applies SFAS No. 143, “Accounting For Asset Retirement Obligations,” to review recognition of fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company also applies SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate the carrying amount of such assets might not be recoverable and has concluded no financial statement adjustment is required.

(p) New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 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 123R was to be effective as of the first interim or annual reporting period that began after June 15, 2005. On April 14, 2005, the compliance date was extended such that SFAS 123R is effective at the start of the next fiscal period beginning after June 15, 2005, which is January 1, 2006 for the Company. The Company will adopt SFAS 123R on January 1, 2006 and does not expect the adoption to have a material impact on the Company’s consolidated balance sheet, statements of operations, or cash flows.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces ABP Opinion No. 20, “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 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 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 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The implementation of SFAS 154 is not expected to have a material impact on the Company’s consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 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 and the Company adopted this interpretation for the year ended December 31, 2005. Adopting FIN No. 47 did not have a material impact in the Company’s financial position, results of operations, or cash flows.

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109. FIN No. 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. The Company is currently evaluating the impact the adoption of FIN 48 will have on its financial statements.

(3) Business Combinations—2005 Acquisitions

The purchase price for the assets of the Norwood Acquisition was $587 and the purchase price for the assets of the Call Acquisition was $487. The purchase prices for both acquisitions were allocated to the acquired assets based on their fair market values. The excess of the purchase price over the fair market value of the net identifiable assets acquired was $52 for the Norwood Acquisition and $104 for the Call Acquisition.

Both acquisitions were accounted for by the purchase method of accounting for business combinations. Accordingly, the accompanying consolidated statements of operations do not include any revenue or expenses related to the Norwood Acquisition or the Call Acquisition prior to the acquisition date of January 28, 2005. Had each of these acquisitions occurred as of January 1, 2005 or 2004, the impact on the Company’s results of operations would not have been significant. The

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

following table summarizes the estimated fair values from third-party valuations of the assets acquired at the date of acquisition.

 

Fair value—Norwood Acquisition:

  

Furniture and fixtures

   $ 10

Trademarks

     69

Subscriber list

     36

Advertising accounts

     120

Noncompete agreements

     300

Goodwill

     52
      

Net assets acquired

   $ 587
      

 

Fair value—Call Acquisition:

  

Furniture and fixtures

   $ 10  

Trademarks

     120  

Advertising accounts

     165  

Noncompete agreements

     88  

Goodwill

     104  
        

Total acquisition cost

     487  

Less note payable to seller

     (225 )
        

Net assets acquired

   $ 262  
        

Of the intangible assets acquired, the trademarks have an estimated useful life of 15 years, the subscriber list has an estimated useful life of 6 years and the advertising accounts have an estimated useful life of 12 years. The noncompete agreements have lives ranging from 2 to 4 years.

(4) Property, Plant and Equipment, Net

Property, plant and equipment, net are summarized as follows:

 

     2004     2005  

Land

   $ 2,650     $ 2,650  

Buildings

     10,090       10,203  

Furniture and fixtures

     403       413  

Leasehold, building and land improvements

     403       445  

Vehicles

     2,221       2,260  

Machinery and equipment

     4,299       4,407  

Computer hardware and software

     2,890       3,434  

Purchase of manufacturing facility by an agent (non-operating)(a)

     —         5,582  
                
     22,956       29,394  

Less: accumulated depreciation

     (5,382 )     (7,015 )
                
   $ 17,574     $ 22,379  
                

Depreciation expense for the period from January 1, 2003 to March 31, 2003, the period from April 1, 2003 to December 31, 2003 and the years ended December 2004 and 2005 was $602, $3,085, $3,027, and $2,075, respectively.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

(a) On December 23, 2005 a third party agent/intermediary (pursuant to a tax free exchange rule) acquired a vacant manufacturing facility for the benefit of the Company in the amount of $5,582. Such purchase was facilitated by an advance of the acquisition amount to the agent by the Company. As of December 31, 2005, the Company was in the process of developing its plans for this facility. There is no additional liability pursuant to the acquisition of this facility.

(5) Other Intangible Assets, net

Other intangible assets, net are summarized as follows:

 

     As of December 31, 2004
     Gross carrying
amount
   Accumulated
amortization
   Net carrying
amount

Advertising accounts

   $ 45,849    $ 4,458    $ 41,391

Noncompete and consulting agreement

     625      273      352

Subscriber lists

     20,114      2,489      17,625

Trademarks—indefinite-lived

     6,083      —        6,083
                    

Total

   $ 72,671    $ 7,220    $ 65,451
                    
     As of December 31, 2005
     Gross carrying
amount
   Accumulated
amortization
   Net carrying
amount

Advertising accounts

   $ 46,134    $ 7,019    $ 39,115

Noncompete and consulting agreement

     1,054      580      474

Subscriber lists

     20,150      3,913      16,237

Trademarks—indefinite-lived

     6,083      —        6,083

Trademarks—finite-lived

     189      8      181
                    

Total

   $ 73,610    $ 11,520    $ 62,090
                    

Amortization expense for the period from January 1, 2003 to March 31, 2003, the period from April 1, 2003 to December 31, 2003 and the years ended December 31, 2004 and 2005 totaled $1,277, $3,094, $4,125 and $4,300, respectively. Amortization is expected to total approximately $4,306, $4,208, $4,069, $3,030 and $4,030 for the years ending December 31, 2006, 2007, 2008, 2009 and 2010, respectively.

Certain former owners of EPC have agreed not to compete with the Company’s current newspaper operations and to provide consulting services as necessary. The consideration for this agreement is payable in quarterly payments through October 2006. For the years ended December 31, 2004 and 2005, payments totaled $500 per year. In 2005, the Company agreed to pay $300 as part of the Norwood Acquisition and $88 as part of the Call Acquisition to certain personnel for agreements not to compete with the Company.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

(6) Accrued Expenses

Accrued expenses consists of the following:

 

     December 31,
     2004    2005

Payroll

   $ 1,283    $ 997

Vacation

     677      677

Interest

     994      906

Other

     833      613
             

Total accrued expenses

   $ 3,787    $ 3,193
             

(7) Long-Term Debt

Long-term debt consists of the following:

 

     December 31,  
     2004     2005  

Senior debt—term loan facilities (refinanced in 2005)

   $ 64,738     $ 75,000  

Mortgage obligation

     4,243       4,049  

Note payable

     —         225  
                
     68,981       79,274  

Less: current portion—long-term debt

     (7,282 )     (893 )
                

Total long-term debt

   $ 61,699     $ 78,381  
                

(a) Senior Debt

On January 21, 2005, senior debt of $64,738 was repaid with the proceeds of a new term loan facility, with a syndicate of lending institutions led by Wachovia Bank.

The new term loan facility consists of $75,000 in principal, bearing interest at the prevailing 3-month LIBOR Rate plus 3.0% (7.2% at December 31, 2005). Principal payments of $188 are due quarterly (commencing April 1, 2006), with the final maturity and balloon payment of $35,250 due in July 2012.

In connection with the issuance of the new term loan facility, the Company incurred debt issuance costs of $1,576 and wrote off debt issuance costs associated with the existing facility of approximately $2,025.

Prior to the refinancing, the Company had a term loan facility of $70,000, accruing interest at the prevailing 3-month LIBOR rate plus 3.5% to 4.0%, payable quarterly, with principal payments due through September 2009. In conjunction with this term loan facility, the Company also had a revolving loan facility of $14,000 which bore interest at the higher of the bank’s prime rate or the Federal funds effective rate plus 2.7% to 3% that was scheduled to expire in March 2009. There was no balance outstanding under the revolving loan facility at December 31, 2004.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

Obligations under both term loan facilities are/were collateralized by a pledge of all of the Company’s tangible and intangible assets and intellectual property. The 2005 term loan facility contains restrictions on additional indebtedness, asset sales, dividends and other distributions, capital expenditures, transactions with affiliates and other unrelated business activities. Financial performance covenants for the 2005 term loan facility and line of credit include interest coverage, leverage ratio, and fixed charge coverage ratios. The Company was in compliance with the covenants at December 31, 2005.

(b) Revolving Credit Loan

In conjunction with the new term loan facility, the Company also secured a revolving loan facility with a maximum borrowing capacity of $25,000. The outstanding balance on the revolving loan facility at December 31, 2005 was $6,500 with interest accruing at the bank’s Prime rate plus 1.75% (9.00% at December 31, 2005). The revolving loan facility is scheduled to mature on December 31, 2010.

(c) Mortgage

In December 2003, in conjunction with the acquisition of SCP (Note 1), the Company assumed a long-term, fixed rate mortgage and security agreement. The loan provides for a ten-year mortgage with principal and interest of $37 payable monthly through December 2012 and with the balance due on January 10, 2013. The mortgage bears interest at a rate of 6.117% per annum. The mortgage is collateralized by a first lien on, and an assignment of rents and leases of, the property mortgaged by SCP.

(d) Note Payable

In connection with the 2005 Call Acquisition (Note 3), $225 of the acquisition was financed with a two year promissory note. The note provides for a principal payment of $125 plus accrued interest to be paid on the first anniversary date of the closing, and a principal payment of $100 plus accrued interest to be paid on the second anniversary date of the closing. The note bears interest of prime plus 1.5%, (8.75% at December 31, 2005).

(e) Maturities of Long-term debt

Maturities of long-term debt at December 31, 2005 are as follows:

 

     Term Loan
Facility
   Mortgage    Note Payable    Total

2006

   $ 562    $ 206    $ 125    $ 893

2007

     750      219      100      1,069

2008

     750      233      —        983

2009

     750      248      —        998

2010

     750      264      —        1,014

Thereafter

     71,438      2,879      —        74,317
                           

Total

   $ 75,000    $ 4,049    $ 225    $ 79,274
                           

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

(8) Interest Rate Swap Agreement

The Company is party to an interest rate swap agreement. The notional amount of the interest rate swap is $36,000. The agreement includes a floating rate option based on the three-month LIBOR. The Company incurs interest expense equal to the difference between the applicable rate and 2.79% when the rate is less than 2.79%. The Company recognizes interest income equal to the difference between the applicable rate and 2.79% when the rate is greater than 2.79%. The agreement qualifies for cash flow hedge accounting in accordance with FAS No. 133. It will expire on November 1, 2006 and the residual balance is expected to be reclassified at that time. The value of the interest rate swap at December 31, 2004 and 2005 was an asset of $300 and $662, respectively. The increases in fair market value of $473 and $362 during 2004 and 2005, respectively, were included as a component of other comprehensive income.

(9) Member’s Interest

(a) Non-cash Compensation

In connection with the Sale Transaction, Promote Interests were issued to a member of management. No further Promote Interests have been issued subsequently. The rights of the holder of Promote Interests are identical to those of ENM LLC membership interest holders, except that holder of Promote Interests does not have voting rights and does not receive a share in liquidation proceeds of the Company until holders of membership interests have received their unreturned capital contributions. Additionally, upon the termination of employment of any individuals to whom Promote Interests have been allocated, the Company has the option to repurchase the Promote Interests. There were no repurchases in 2004 and 2005. The timing, nature and circumstances surrounding the termination will determine whether the repurchase price is at cost or fair market value, as defined by the LLC Agreement, of the Promote Interests.

As the Promote Interests are, in substance, to be issued to employees of the Company, they are accounted for under Accounting Principles Board Opinion 25 (“APB 25”) “Accounting for Stock Issued to Employees”. The 250 Promote Interests issued through December 31, 2003 were issued at a nominal purchase price that was below their fair market value at issuance. The fair market value was determined using the Black-Scholes valuation model. In accordance with APB 25, the $80 spread between cost and fair market value of the issued Promote Interests has been recorded as unearned compensation, a component of member’s interest in the consolidated balance sheet. Had the Promote Interest been measured using a fair value methodology, the difference in compensation expense and net income (loss) would have been de minimis for all periods presented. The unearned compensation is being amortized on a straight-line basis as compensation expense over the period the Promote Interests are subject to repurchase at cost. During the period from April 1,2003 to December 31, 2003, and years ended December 31, 2004 and 2005, $9, $12, and $12 was recognized as compensation expense, respectively.

(b) Management Incentive Interests

In connection with the formation of ENM LLC, the Company authorized a number of Management Incentive Interests allocable to certain members of ENM LLC’s senior management. The Management Incentive Interests allow for members of senior management to share in the liquidation proceeds of the Company if certain threshold enterprise value targets are attained upon a liquidation event. Upon

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

liquidation, the individuals to whom Management Incentive Interests have been allocated are to be issued membership interests representing a fully diluted share in liquidation proceeds from a minimum of 0% to a maximum of 12%. The aggregate percentage share is based on a sliding scale and increases as the enterprise value meets targets defined in the LLC Agreement. There is no liability on the balance sheet at December 31, 2005 and 2004.

Upon the termination of employment of any individuals to whom Management Incentive Interests have been allocated, the Company has the option to repurchase the Management Incentive Interests. The timing, nature and circumstances surrounding the termination will determine whether the repurchase price is at cost or fair market value, as defined by the LLC Agreement, of the Management Incentive Interests.

(10) Pension and Other Postretirement Benefits

EPC sponsors a 401(k) retirement plan for certain of its non-union employees. Non-union employees who have completed at least one year of service with EPC, have worked a minimum of 1,000 hours, and have attained the age of 21 are eligible to participate in the plan. These employees can elect to contribute up to 25% of their gross salary to the plan subject to IRS limitations. EPC matches 50% of the first 6% of contributions to the plan and may, at its discretion, make additional contributions to the plan. In connection with the required match, EPC’s contribution to this plan was $14, $41, $53 and $44 during the period from January 1, 2003 to March 31, 2003, period from April 1, 2003 to December 31, 2003, and the years ended December 31, 2004 an 2005, respectively. An additional discretionary contribution to this plan of $56, $58 and $47 was accrued and charged against income during the period from April 1, 2003 to December 31, 2003, and years ended December 31, 2004 and 2005, respectively.

EPC also sponsors a 401(k) retirement plan for certain of its union employees. Union employees who have completed at least three months of service with EPC and have attained the age of 21 are eligible to participate in the plan. Employees can elect to contribute up to 25% of their gross salary to the plan subject to IRS limitations. The EPC does not match contributions and does not make additional contributions to this plan.

In addition, the Company sponsors a 401(k) Profit Sharing Plan for certain employees of GWP and MPG. Employees can elect to contribute up to 25% of their gross salary to the plan subject to IRS limitations. The Company matches 2% of the employees’ weekly contribution at GWP. There is no company match at MPG. In connection with the required match, the subsidiary’s contribution to this plan was $4, $12, $17 and $20 during the period from January 1, 2003 to March 31, 2003, the period from April 1, 2003 to December 31, 2003 and the years ended December 31, 2004 and 2005, respectively.

The Company also maintains a pension plan and a postretirement medical and life insurance plan which cover certain employees of GWP and MPG. The Company uses the accrued benefit actuarial method and best estimate assumptions to determine pension costs, liabilities and other pension information for defined benefit plans.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

The following provides information on the pension plan and post-retirement medical and life insurance plan as of and for the period from January 1, 2003 to March 31, 2003, the period from April 1, 2003 to December 31, 2003 and the years ended December 31, 2004 and 2005:

 

   

Pension

Year Ended

   

Post Retirement

Year Ended

 
    2004     2005     2004     2005  

Change in projected benefit obligation:

       

Benefit obligation at beginning of year

  $ 18,663     $ 20,552     $ 10,107     $ 10,067  

Service cost

    481       523       472       380  

Interest cost

    1,177       1,178       573       514  

Actuarial (gain) loss

    1,424       383       (849 )     (1,267 )

Benefits and expenses paid

    (1,193 )     (1,182 )     (236 )     (224 )
                               

Projected benefit obligation at end of year

  $ 20,552     $ 21,454     $ 10,067     $ 9,470  
                               

Change in plan assets:

       

Fair value of plan assets at beginning of year

  $ 16,966     $ 16,857     $ —       $ —    

Actual return on plan assets

    1,083       541       —         —    

Employer contribution

    —         —         236       224  

Benefits paid

    (959 )     (987 )     (236 )     (224 )

Expenses paid

    (233 )     (195 )     —         —    
                               

Fair value of plan assets at end of year

  $ 16,857     $ 16,216     $ —       $ —    
                               

Reconciliation of funded status

       

Benefit obligation at end of period

  $ (20,552 )   $ (21,454 )   $ (10,067 )   $ (9,470 )

Fair value of assets at end of period

    16,857       16,216       —         —    
                               

Funded status

    (3,695 )     (5,238 )     (10,067 )     (9,470 )

Unrecognized actuarial (gain) loss

    254       1,568       (1,477 )     (2,612 )
                               

Net prepaid/(accrued) benefit cost

  $ (3,441 )   $ (3,670 )   $ (11,544 )   $ (12,082 )
                               

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

    Pension     Post Retirement  
   

Period from

January 1,

2003 to

March 31,

2003

   

Period from

April 1,

2003 to

December 31,

2003

   

Year Ended

December 31,

   

Period from

January 1,

2003 to

March 31,

2003

   

Period from

April 1,

2003 to

December 31,

2003

 

Year Ended

December 31,

 
           
      2004     2005         2004     2005  
    (Predecessor)     (Successor)     (Successor)     (Successor)     (Predecessor)     (Successor)   (Successor)     (Successor)  

Components of net periodic benefit cost:

               

Service cost

  $ 116     $ 317     $ 481     $ 523     $ 128     $ 413   $ 472     $ 380  

Interest cost

    290       872       1,177       1,178       157       483     573       514  

Expected return on plan assets

    (348 )     (1,000 )     (1,484 )     (1,472 )     —         —       —         —    

Amortization of prior service cost

    6       —         —         —         (18 )     —       —         —    

Amortization of unrecognized gain (loss)

    108       —         —         —         79       —       (36 )     (132 )
                                                             

Net periodic benefit cost

  $ 172     $ 189     $ 174     $ 229     $ 346     $ 896   $ 1,009     $ 762  
                                                             

Comparison of obligations to plan assets:

               

Projected benefit obligation

  $ 18,364     $ 18,663     $ 20,552     $ 21,454     $ 10,060     $ 10,106   $ 10,067     $ 9,470  

Accumulated benefit obligation

    16,719       16,949       18,614       19,422       10,060       10,106     10,067       9,470  

Fair value of plan assets

    15,286       16,966       16,857       16,216       —         —       —         —    

The following assumptions were used in connection with the Company’s actuarial valuation of its defined benefit pension and post retirement plans:

 

    Pension     Post Retirement  
   

Period from

January 1,

2003 to

March 31,

2003

   

Period from

April 1,

2003 to

December 31,

2003

   

Year Ended

December 31,

   

Period from

January 1,

2003 to

March 31,

2003

   

Period from

April 1,

2003 to

December 31,

2003

   

Year Ended

December 31,

 
           
      2004     2005         2004     2005  
    (Predecessor)     (Successor)     (Successor)     (Successor)     (Predecessor)     (Successor)     (Successor)     (Successor)  

Weighted average discount rate

  6.50 %   6.30 %   6.00 %   5.75 %   6.50 %   6.30 %   6.00 %   5.75 %

Rate of increase in future compensation levels

  4.00 %   4.00 %   4.00 %   4.00 %   4.00 %   4.00 %   4.00 %   4.00 %

Expected return on assets

  9.00 %   9.00 %   9.00 %   9.00 %   —       —       —       —    

Current year trend

  —       —       —       —       11.00 %   11.00 %   10.00 %   9.25 %

Ultimate year trend

  —       —       —       —       5.50 %   5.50 %   5.50 %   5.50 %

Year of ultimate trend

          2011     2011     2011     2011  

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

     Post Retirement  
     2004     2005  

Effect of 1% increase in Health Care Cost Trend Rates

    

APBO

   $ 11,801     $ 11,013  

Dollar Change

   $ 1,734     $ 1,543  

Percent Change

     17.225 %     16.294 %

Effect of 1% decrease in Health Care Cost Trend Rates

    

APBO

   $ 8,683     $ 8,227  

Dollar Change

   $ (1,384 )   $ (1,243 )

Percentage Change

     (13.748 )%     (13.126 )%

Amortization of prior service costs was calculated using the straight-line method over the average remaining service periods of the employees expected to receive benefits under the Plan.

The Plan’s assets by asset category are as follows:

 

     Pension     Post Retirement
     2004     2005     2004    2005

Equity funds

   64 %   67 %   —      —  

Debt funds

   36 %   33 %   —      —  
                     

Total

   100 %   100 %   —      —  
                     

The Company considers various factors in estimating the expected long-term rate of return on plan assets. Among the factors considered include the historical long-term returns on plan assets, the current and expected allocation of plan assets, input from the actuaries and investment consultants, and long-term inflation assumptions. The expected allocation of plan assets is based on a diversified portfolio consisting of domestic and international equity securities and fixed income securities.

The Company’s investment policy for its pension plan is to balance risk and return using a diversified portfolio consisting primarily of high quality equity and fixed income securities. The target allocation of equity funds is 65% and debt funds 35% of the portfolio’s investments. To accomplish this goal, each plan’s assets are actively managed by outside investment managers with the objective of optimizing long-term return while maintaining a high standard of portfolio quality and proper diversification. The Company monitors the maturities of fixed income securities so that there is sufficient liquidity to meet current benefit payment obligations.

The following benefit payments, which reflect expected future services, as appropriate, are expected to be paid as follows:

 

     Pension    Post Retirement

2006

   $ 1,043    $ 335

2007

     1,072      361

2008

     1,112      371

2009

     1,170      401

2010

     1,210      442

2011-2015

     7,068      2,935

Employer contribution expected to be paid during the year ending December 31, 2006

   $ —      $ 335

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

(11) Equity Investment

Prior to January 2005, the Company maintained a 50% interest in Colony South Associates, LP (“Colony South”), an equity investment with Vazza Group Limited Partnership (“Vazza”). The Company accounted for its investment in Colony South under the equity method. Colony South owned and operated a commercial office complex, which was partially leased to the Company. Vazza served as the managing partner. In January 2005, the commercial office complex real estate was foreclosed on and purchased by an independent third party. In connection with the foreclosure, Colony South had no further liability associated with the office complex and was dissolved in January 2005. There was no gain or loss upon the dissolution.

(12) Related Party Transactions

For the period from January 1, 2003 to March 31, 2003, the Company had an agreement with Newspaper Media LLC to provide management services to the Company at an annual fee plus certain allocated expenses. The Company’s Chief Executive Officer was a member of Newspaper Media LLC. Fees and expenses paid to Newspaper Media LLC under the agreement amounted to $300 for the three months ended March 31, 2003. In connection with the Sale Transaction on April 1, 2003, this agreement was dissolved.

As noted in Note 11, the Company leased commercial space from Colony South, of which the Company owned 50% via its equity investment. With respect to the foreclosure, the lease was terminated and rent in 2005 was paid to the independent third-party. Aggregate rent expense during the period from January 1, 2003 to March 31, 2003, the period from April 1, 2003 to December 31, 2003, and the years ended December 31, 2004 and 2005 was $637, $1,491, $1,659, and $1,064, respectively.

In addition, the Company paid $193 in 2005 to a member for management services.

(13) Commitments and Contingencies

The Company has a ten year non-cancelable lease agreement that expires March 2015 as well as other machinery and equipment leases. The Company is obligated for the following amounts under the aggregate leases:

 

2006

   $ 1,005

2007

     1,042

2008

     1,080

2009

     1,100

2010

     1,141

Thereafter

     5,305
      

Total

   $ 10,673
      

In connection with the office lease, the Company was given allowances for leasehold improvements by the landlord amounting to $823, which is amortized over the 10 year contractual period of the lease.

Rent expense for the period from January 1, 2003 to March 31, 2003, the period from April 1, 2003 to December 31, 2003 and the years ended December 31, 2004 and 2005 totaled $637, $1,491, $1,659 and $1,064, respectively.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Consolidated Financial Statements—(Continued)

(dollar amounts in thousands)

 

Effective January 28, 2005, in connection with the Call Acquisition, the Company entered into two employment agreements for a period of two years each. Compensation under the employment agreements totals $120 per year.

The Company is involved in routine legal matters in the normal course of business. In the opinion of management, and based on consultation with legal counsel, the ultimate resolution of such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

At December 31, 2004 and 2005 the Company had a $390 outstanding letter of credit agreement with a bank guaranteeing deductibles on insurance policies.

(14) Subsequent Events (unaudited)

On June 6, 2006, through a series of transactions, Gatehouse Media, Inc. and subsidiaries, headquartered in Fairport, New York acquired all of the equity interests of ENM LLC for $180,000 through a Securities Purchase Agreement. Simultaneously with the sale of the Company, the senior bank debt totaling $81,813, plus accrued interest of $737 net of the fair value of an interest rate derivative contract associated with the bank debt, the remaining liability of $250 due on noncompete and consulting agreements, and the balance of $100 on a note payable due to the former owners of the Call Group were paid in full. Immediately prior to these transactions, the Company distributed property it acquired pursuant to a tax-free exchange through an agent and the triple net lease as described in Note 4 and Note 1, respectively, to the Company’s consolidated financial statements as of December 31, 2005 and 2004, to the former owners of ENM LLC.

 

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ENTERPRISE NEWSMEDIA, LLC

Unaudited Condensed Consolidated Balance Sheet

March 31, 2006

(dollar amounts in thousands)

 

     March 31,
2006
ASSETS   

CURRENT ASSETS

  

Cash and cash equivalents

   $ 2,315

Trade receivables, net of allowance for doubtful accounts of $507

     6,646

Inventories

     772

Prepaid expenses and other current assets

     712
      

Total current assets

     10,445
      

PROPERTY, PLANT AND EQUIPMENT—NET

     22,269

OTHER ASSETS

  

Goodwill

     74,841

Other intangible assets—net

     61,134

Other assets

     2,208
      

Total assets

   $ 170,897
      
LIABILITIES AND MEMBERS’ INTEREST   

CURRENT LIABILITIES

  

Accounts payable

   $ 2,085

Accrued expenses

     3,435

Current portion—long-term debt

     1,062

Current portion—noncompete and consulting agreements

     375

Deferred revenue

     2,181

Revolving credit loan

     5,000
      

Total current liabilities

     14,138
      

LONG-TERM LIABILITIES

  

Long-term debt, net of current portion

     78,042

Pension and other post-retirement benefit obligations

     16,261

Other liabilities

     387
      

Total liabilities

     108,828

MEMBER’S INTEREST

     62,069
      

Total liabilities and members’ interest

   $ 170,897
      

The accompanying notes are an integral part of these consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Unaudited Condensed Consolidated Statements of Operations

For the three months ended March 31, 2005 and March 31, 2006

(dollar amounts in thousands)

 

     Three Months
Ended March 31,
2005
    Three Months
Ended March 31,
2006
 

Revenues:

    

Advertising

   $ 12,591     $ 13,072  

Circulation

     5,429       5,137  

Commercial printing and other

     121       128  
                

Total revenues

     18,141       18,337  
                

Operating costs and expenses:

    

Production

     5,836       5,956  

Selling, general and administrative

     10,033       11,035  

Depreciation and amortization

     1,504       1,532  
                

Total operating expenses

     17,373       18,523  
                

Income (loss) from operations

     768       (186 )
                

Other income (expenses):

    

Interest expense

     (1,200 )     (1,391 )

Interest income

     1       4  

Amortization of deferred financing costs

     (76 )     (55 )

Write-off of deferred financing costs upon extinguishment of debt

     (2,025 )     —    

Other

     47       50  
                

Total other income (expenses)

     (3,253 )     (1,392 )
                

Net loss

   $ (2,485 )   $ (1,578 )
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Unaudited Condensed Consolidated Statements of Member’s Interest and Comprehensive Income (Loss)

For the three months ended March 31, 2006

(dollar amounts in thousands)

 

    Member’s
Interest
    Accumulative
Other
Comprehensive
Income (Loss)
    Unearned
Compensation
    Total     Total
Comprehensive
Income (Loss)
 

Balance at December 31, 2005

  $ 63,349     $ 662     $ (47 )   $ 63,964    

Amortization of unearned compensation

    —         —         3       3    

Unrealized loss on cash flow hedge

      (66 )       (66 )     (66 )

Distributions

    (254 )     —         —         (254 )  

Net loss

    (1,578 )     —         —         (1,578 )     (1,578 )
                                       

Balance at March 31, 2006

  $ 61,517     $ 596     $ (44 )   $ 62,069    
                                 

Total comprehensive loss

          $ (1,644 )
               

The accompanying notes are an integral part of these consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Unaudited Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2005 and March 31, 2006

(dollar amounts in thousands)

 

     Three Months Ended
March 31, 2005
    Three Months Ended
March 31, 2006
 

Cash flows from operating activities:

    

Net loss

   $ (2,485 )   $ (1,578 )

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     1,504       1,532  

Amortization of unearned compensation

     3       3  

Amortization of deferred financing costs

     76       55  

Write-off of deferred financing costs upon extinguishment of debt

     2,025       —    

Gain on the sale of property, plant and equipment

     6       —    

Changes in operating assets and liabilities, net of acquisitions:

    

Trade receivables

     894       747  

Inventories

     129       274  

Prepaid expenses and other current assets

     375       199  

Other assets

     —         2  

Accounts payable and accrued expenses

     (2,245 )     (900 )

Deferred revenue

     87       157  

Pension and other liabilities

     247       525  
                

Net cash provided by operating activities

     616       1,016  
                

Cash flows from investing activities:

    

Payments of deferred acquisition payments

     (125 )     (125 )

Acquisitions, net of cash acquired

     (849 )     (174 )

Proceeds from sale of property, plant, and equipment

     12       —    

Purchase of property, plant, and equipment

     (253 )     (359 )
                

Net cash used in investing activities

     (1,215 )     (658 )
                

Cash flows from financing activities:

    

Distribution to members

     (16,534 )     (255 )

Repayments of long-term debt

     (64,785 )     (170 )

Repayments on revolving credit facility

     —         (1,500 )

Proceeds from long-term debt

     81,000       —    

Deferred financing costs

     (1,514 )     (39 )
                

Net cash used in financing activities

     (1,833 )     (1,964 )
                

Net decrease in cash and cash equivalents

     (2,432 )     (1,606 )

Cash and cash equivalents at the beginning of the period

     6,182       3,921  
                

Cash and cash equivalents at the end of the period

   $ 3,750     $ 2,315  
                

Supplementary disclosures of cash flow information

            

Cash paid for interest

   $ 1,260     $ 902  

Non Cash Activity

The Company owns real estate in Chicopee, Massachusetts that is leased to an independent third party. The lease calls for the tenant to pay the lease payments directly to the Company’s mortgage lender. The lease payments paid by the tenant directly to the mortgage lender was $47 and $50 for the 3 months ended March 31, 2005 and 2006, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Unaudited Condensed Consolidated Financial Statements

For the three months ended March 31, 2005 and March 31, 2006

(dollar amounts in thousands)

(1) Basis of Preparation

The accompanying unaudited condensed consolidated financial statements of Enterprise NewsMedia, LLC and subsidiaries (the “Company” or “ENM”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in comprehensive annual financial statements presented in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to Securities and Exchange Commission (“SEC”) rules and regulations.

Management believes that the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include normal recurring adjustments) necessary for a fair statement of the financial position of ENM as of March 31, 2006, and the results of their operations and cash flows for the quarters ended March 31, 2006 and March 31, 2005. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s audited consolidated financial statements for the year ended December 31, 2005.

As of March 31, 2006, the Company’s significant accounting polices and estimates for year ended December 31, 2005, have not changed from December 31, 2005, except for the adoption of Financial Accounting Standards) “FAS” No. 123 (revised 2004), “Share-Based Payment” (FAS No. 123R”). See Note 2 for additional information regarding the Company’s adoption of FAS No. 123R.

(2) 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. The Company adopted FAS No. 123R in the first quarter of 2006 using the fair market method and modified prospective application method.

FAS No. 123R requires stock-based compensation expense to be recognized over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service.

The Company accounted for its Promote Interests in accordance with the intrinsic value method set forth in Accounting Principles Board Opinion No. 25 and related interpretations. Interests were issued at a nominal purchase price that was below their fair market value at issuance. The fair market value of the Promote Interests was determined using the Black-Scholes valuation model, and the difference between cost and fair market value of the issued interest was recorded as unearned

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

For the three months ended March 31, 2005 and March 31, 2006

(dollar amounts in thousands)

 

compensation, a component of member’s interest in the consolidated balance sheet. The unearned compensation was amortized on a straight-line basis to compensation expense over the period the interests are subject to repurchase at cost. Had the Promote Interests been measured using a fair value methodology, the difference in compensation expense and net income (loss) would have been diminimus.

(3) Business Combinations

On January 28, 2005, the Company acquired certain assets of the Norwood Bulletin and certain assets of the Call Group and on February 24, 2006 the Company acquired certain assets of the Associated Newspapers. The purchase price for certain assets of the Norwood Bulletin was $587, the purchase price for certain assets of the Call Group was $487 and the purchase price for certain assets of the Associated Newspapers was $152. The purchase price for each acquisition was allocated to the assets based on their fair market values. The excess of the purchase price over the fair market value of the net identifiable assets acquired was $52 for the Norwood Bulletin, $104 for the Call Group and $2 for the Associated Newspapers.

Each acquisition was accounted for by the purchase method of accounting for business combinations. Accordingly, the accompanying consolidated statements of operations do not include any revenue or expenses related to the Norwood Bulletin or the Call Group prior to the acquisition date of January 28, 2005, and for the Associated Newspapers prior to the acquisition date of February 24, 2006. Had the Norwood Bulletin or Call Group acquisition occurred as of January 1, 2005 or 2004, or the Associated acquisition occurred as of January 1, 2006 or 2005, the impact on the Company’s results of operations would not have been significant.

(4) Pension and Postretirement Benefits

The following provides information on the pension plan and post-retirement medical and life insurance plan as of and for period ended March 31, 2006 and 2005:

 

     Pension Benefits     Postretirement
Benefits
 
     March 31,
2005
    March 31,
2006
    March 31,
2005
    March 31,
2006
 

Components of Net Periodic Benefit Costs

        

Service cost

   $ 131     $ 175     $ 95     $ 103  

Interest cost

     295       301       129       134  

Expected return on plan assets

     (368 )     (353 )     —         —    

Amortization of unrecognized gain (loss)

     —         —         (33 )     (30 )
                                

Net periodic benefit cost

     58       123       191       207  

Special termination benefits

     —         179       —         —    
                                

Total

   $ 58     $ 302     $ 191     $ 207  
                                

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

For the three months ended March 31, 2005 and March 31, 2006

(dollar amounts in thousands)

 

(5) Other Intangible Assets

Other intangible assets are summarized as follows:

 

     As of March 31, 2006
     Gross carrying
amount
   Accumulated
amortization
   Net carrying
amount

Advertising accounts

   $ 46,172    $ 7,670    $ 38,502

Covenant not to compete/consulting agreement

     1,063      625      438

Subscriber lists

     20,152      4,273      15,879

Trademarks—indefinite-lived

     6,083      —        6,083

Trademarks—finite-lived

     247      15      232
                    

Total

   $ 73,717    $ 12,583    $ 61,134
                    

Amortization expense for the three months ended March 31, 2005 and 2006 was $1,053 and $1,063, respectively.

(6) Long-Term Debt

(a) Senior Debt

On January 21, 2005, senior debt of $64,738 was repaid with the proceeds of new term loan facility, with a syndicate of lending institutions led by Wachovia Bank.

The new term loan facility consists of $75,000 in principal, with the interest at the prevailing 3-month LIBOR rate plus 3.0% (7.63% at March 31, 2006) with principal payment of $188 due quarterly (commencing April 1, 2006) with a final maturity and balloon payment of $35,250 in July 2012. At March 31, 2006, the outstanding balance on the term loan was $75,000.

In connection with the issuance of the new term loan facility, the Company incurred debt issuance costs of $1,576 and wrote off debt issuance costs associated with the existing facility of approximately $2,025.

Obligations under term loan facilities are collateralized by a pledge of all of the Company’s tangible and intangible assets and intellectual property. The 2005 term loan facility contains restrictions on additional indebtedness, asset sales, dividends and other distributions, capital expenditures, transactions with affiliates and other unrelated business activities. Financial performance covenants for the 2005 term loan facility and revolving credit loan include interest coverage, leverage ratio, and fixed charge coverage ratio. The Company was in compliance with all such covenants at March 31, 2006.

(b) Revolving Credit Loan

In conjunction with the term loan facility, the Company also secured a revolving loan facility with a maximum borrowing capacity of $25,000. The outstanding balance on the revolving loan facility at March 31, 2006 was $5,000 with interest at the bank’s Prime rate plus 1.75%. The revolving loan facility is scheduled to mature in December 31, 2010.

 

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ENTERPRISE NEWSMEDIA, LLC

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

For the three months ended March 31, 2005 and March 31, 2006

(dollar amounts in thousands)

 

(c) Mortgage

In December 2003, the Company assumed a long-term, fixed rate mortgage and security agreement. The outstanding balance of the mortgage was $4,004 as of March 31, 2006. The loan provides for a ten-year mortgage with principal and interest of $37 payable monthly through December 2012 and with the balance due on January 10, 2013. The mortgage bears interest at a rate of 6.117% per annum. The mortgage is collateralized by a first lien on, and an assignment of rents and leases of, the property mortgaged.

(d) Note Payable

In connection with the 2005 acquisition of the Call Group as described in Note 3, $225 of the acquisition was financed with a two year promissory note. The note provides for a principal payment of $125 plus accrued interest to be paid on the first anniversary date of the closing, and a principal payment of $100 plus accrued interest to be paid on the second anniversary date of the closing. The note bears interest of prime plus 1.5% (9.0% at March 31, 2006). The balance on the note as of March 31, 2006 was $100.

(7) Subsequent Events

On June 6, 2006, through a series of transactions, Gatehouse Media, Inc. and subsidiaries, headquartered in Fairport, New York acquired all of the equity interests of ENM LLC, for $180,000 through a Securities Purchase Agreement. Simultaneously with the sale of the Company, the senior bank debt totaling $81,813, plus accrued interest of $737 net of the fair value of an interest rate derivative contract associated with the bank debt, the remaining liability of $250 due on noncompete and consulting agreements, and the balance of $100 on a note payable due to the former owners of the Call Group were paid in full. Immediately prior to these transactions, the Company distributed property it acquired pursuant to a tax-free exchange through an agent and the triple net lease as described in Note 4 and Note 1, respectively, to the Company’s consolidated financial statements as of December 31, 2004 and 2005, to the former owners of ENM LLC.

 

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No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 


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 Consolidated Financial Statements

   F-1

 


Through and including                     , 2006 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 



             Shares

 

GateHouse Media, Inc.

Common Stock

LOGO

 


Goldman, Sachs & Co.

Wachovia Securities

 

 



Table of Contents

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

Set forth below is a table of the registration fee for the Securities and Exchange Commission, the filing fee for the National Association of Securities Dealers, Inc., the listing fees for the New York Stock Exchange and estimates of all other expenses to be incurred in connection with the issuance and distribution of the securities described in the Registration Statement, other than underwriting discounts and commissions:

 

Securities and Exchange Commission registration fee

   $ 21,400

NASD fee

     20,500

New York Stock Exchange listing fee

     *

Printing and engraving expenses

     *

Legal fees and expenses

     *

Accounting fees and expenses

     *

Transfer agent and registrar fees

     *

Miscellaneous

     *

Total

   $ *
      

* To be completed by amendment.

Item 14. Indemnification of Directors and Officers

We are a Delaware corporation. Reference is made to Section 102(b)(7) of the Delaware General Corporation Law (the “DGCL”), which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director for violations of the director’s fiduciary duty, except (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payments of dividends of unlawful stock purchase or redemptions), or (iv) for any transaction from which a director derived an improper personal benefit.

Reference is also made to Section 145 of the DGCL, which provides that a corporation may indemnify any person, including an officer or director, who is, or is threatened to be made, party to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer, director, employee or agent acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the corporation’s best interest and, for criminal proceedings, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify any officer or director in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses that such officer or director actually and reasonably incurred.

Our certificate of incorporation and by-laws generally eliminate the personal liability of our directors for breaches of fiduciary duty as a director and indemnify directors and officers to the fullest extent permitted by the Delaware General Corporation Law.

 

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We intend to enter into indemnity agreements with each of our directors and executive officers, which will provide for mandatory indemnity of an executive officer or director made party to a “proceeding” by reason of the fact that the indemnitee is or was an executive officer or director of ours, if the indemnitee acted in good faith and in a manner the indemnitee reasonably believed to be in or not opposed to our best interests and, in the case of a criminal proceeding, the indemnitee had no reasonable cause to believe that the indemnitee’s conduct was unlawful. These agreements will also obligate us to advance expenses to an indemnitee provided that the indemnitee will repay advanced expenses in the event the indemnitee is not entitled to indemnification. Indemnitees are also entitled to partial indemnification and indemnification for expenses incurred as a result of acting at our request as a director, officer or agent of an employee benefit plan or other partnership, corporation, joint venture, trust or other enterprise owned or controlled by us.

We maintain an insurance policy providing for indemnification of our officers, directors and certain other persons against liabilities and expenses incurred by any of them in certain stated proceedings and under certain stated conditions.

Item 15. Recent Sales of Unregistered Securities

In June 2005, Fortress and certain members of management acquired an aggregate of 1,475 shares of our common stock for an aggregate purchase price of $1.475 million. In addition, on January 29, 2006, Michael E. Reed purchased 250 shares of our common stock for an aggregate purchase price of $250,000. Such sales were made in reliance on the exemption from registration pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder.

Item 16. Exhibits

 

Exhibit

No.

    

Description of Exhibit

1.1 *    Form of Underwriting Agreement
2.1      Agreement and Plan of Merger, dated as of May 9, 2005, by and among FIF III Liberty Holdings LLC, FIF III Liberty Acquisition, LLC and Liberty Group Publishing, Inc.
2.2      Agreement and Plan of Merger and Securities Purchase Agreement, dated May 5, 2006, by and among GateHouse Media, Inc., ENM Merger Sub, Inc., HPM Merger Sub, Inc., ENHE Acquisition, LLC, ENM, Inc., Heritage Partners Media, Inc., Heritage Fund III, L.P., Heritage Fund IIIA, L.P., Heritage Investors III, LLC, Frank E. Richardson, individually and as trustee under certain voting trust agreements, James F. Plugh, Michael H. Plugh, Jennifer V. Plugh, Catherine T. Plugh, Myron F. Fuller, Richard Fuller, Thomas J. Branca, ENHE, LLC and Enterprise NewsMedia Holding, LLC
2.3      Asset Purchase Agreement, dated May 5, 2006, by and among GateHouse Media, Inc., Herald Media, Inc. and CP Media, Inc.
3.1 *    Second Amended and Restated Certificate of Incorporation of GateHouse Media, Inc.
3.2 *    Amended and Restated By-laws of GateHouse Media, Inc.
4.3 *    Form of common stock certificate
4.4 *    Registration Rights Agreement, dated as of                     , 2006, between GateHouse Media, Inc. and FIF III Liberty Holdings LLC
5.1 *    Opinion of Willkie Farr & Gallagher LLP
10.1 *    GateHouse Media Omnibus Stock Incentive Plan
10.2      Liberty Group Publishing, Inc. Publisher’s Deferred Compensation Plan
10.3      Liberty Group Publishing, Inc. Executive Benefit Plan

 

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Exhibit

No.

    

Description of Exhibit

10.4      Liberty Group Publishing, Inc. Executive Deferral Plan
10.5      Separation and Consulting Agreement, dated as of May 6, 2005, by and among Liberty Group Operating, Inc., Liberty Group Publishing, Inc. and Kenneth L. Serota
10.6 *    Form of Indemnification Agreement to be entered into by GateHouse Media, Inc. with each of its executive officers and directors
10.8      Employment Agreement, dated as of January 3, 2006, by and among GateHouse Media, Inc., GateHouse Media Operating, Inc. and Michael E. Reed
10.9      Employment Agreement, dated as of May 9, 2005, by and among Liberty Group Publishing, Inc., Liberty Group Operating, Inc. and Scott Tracy Champion
10.10      Employment Agreement, dated as of May 9, 2005, by and among Liberty Group Publishing, Inc., Liberty Group Operating, Inc. and Randall W. Cope
10.11      Employment Agreement, dated as of April 19, 2006, by and among GateHouse Media, Inc., GateHouse Media Operating, Inc. and Mark R. Thompson
10.12      Employment Agreement, dated as of May 1, 2006, by and among GateHouse Media, Inc., GateHouse Media Operating, Inc. and Polly G. Sack
10.13      Management Stockholder Agreement, dated as of January 29, 2006, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Michael E. Reed
10.14      Amended and Restated Management Stockholder Agreement, dated as of March 1, 2006, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Scott Champion
10.15      Amended and Restated Management Stockholder Agreement, dated as of March 1, 2006, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Randy Cope
10.16      Management Stockholder Agreement, dated as of June 6, 2005, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Gene Hall
10.17      Management Stockholder Agreement, dated as of June 6, 2005, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Dan Lewis
10.18      Management Stockholder Agreement, dated as of June 6, 2005, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Kelly Luvison
10.19      Management Stockholder Agreement, dated as of May 17, 2006, by and between GateHouse Media, Inc., FIF III Liberty Holdings LLC and Polly G. Sack
10.20      Management Stockholder Agreement, dated as of June 6, 2005, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Gerry Smith
10.21      Management Stockholder Agreement, dated as of May 17, 2006, by and between GateHouse Media, Inc., FIF III Liberty Holdings LLC and Mark R. Thompson
10.22      First Lien Credit Agreement, dated as of June 6, 2006, by and between GateHouse Media Holdco, Inc., GateHouse Media Operating, Inc., GateHouse Massachusetts I, Inc., GateHouse Massachusetts II, Inc., GateHouse Massachusetts III, Inc., the domestic subsidiaries of GateHouse Media Holdco, Inc., as Guarantors, the lenders party thereto, and Wachovia Bank, National Association, as Administrative Agent
10.23      Secured Bridge Credit Agreement, dated as of June 6, 2006, by and between GateHouse Media Holdco, Inc., GateHouse Media Operating, Inc., GateHouse Massachusetts I, Inc., GateHouse Massachusetts II, Inc., GateHouse Massachusetts III, Inc., the domestic subsidiaries of GateHouse Media Holdco, Inc., as Guarantors, the lenders party thereto, and Wachovia Bank, National Association, as Administrative Agent

 

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Exhibit

No.

    

Description of Exhibit

21         Subsidiaries of GateHouse Media, Inc.
23.1 *    Consent of Willkie Farr & Gallagher LLP (included in the opinion to be filed as Exhibit 5.1 hereto)
23.2      Consent of KPMG LLP with respect to the consolidated financial statements of GateHouse Media, Inc.
23.3      Consent of PricewaterhouseCoopers LLP with respect to the financial statements of CP Media
23.4      Consent of Grant Thornton LLP with respect to the consolidated financial statements of Enterprise NewsMedia, LLC
23.5      Consent of PricewaterhouseCoopers LLP with respect to the consolidated financial statements of Enterprise NewsMedia, Inc. and Enterprise NewsMedia, LLC
24         Powers of Attorney (included on the signature page)

* To be filed by amendment.

Item 17. Undertakings

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Securities Act”) may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issues.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fairport, State of New York on July 21, 2006.

 

GATEHOUSE MEDIA, INC.

By:

 

/S/    MICHAEL E. REED

Name:   Michael E. Reed
Title:   Chief Executive Officer

In accordance with the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates stated. Each person whose signature appears below constitutes and appoints Wesley R. Edens, Michael E. Reed and Mark Thompson and each of them severally, as his or her true and lawful attorney-in-fact and agent, each acting along with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) and exhibits to the Registration Statement on Form S-1, and to any registration statement filed under Commission Rule 462, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/S/    WESLEY R. EDENS

Wesley R. Edens

  

Chairman of the Board

  July 21, 2006

/S/    MICHAEL E. REED

Michael E. Reed

  

Chief Executive Officer
(principal executive officer)

  July 21, 2006

/S/    MARK R. THOMPSON

Mark R. Thompson

  

Chief Financial Officer
(principal financial officer)

  July 21, 2006

/S/    LINDA A. HILL

Linda A. Hill

  

Corporate Controller
(principal accounting officer)

  July 21, 2006

/S/    WILLIAM B. DONIGER

William B. Doniger

  

Director

  July 21, 2006

/S/    RANDAL A. NARDONE

Randal A. Nardone

  

Director

  July 21, 2006

 

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Exhibit Index

 

Exhibit

No.

    

Description of Exhibit

1.1 *    Form of Underwriting Agreement
2.1      Agreement and Plan of Merger, dated as of May 9, 2005, by and among FIF III Liberty Holdings LLC, FIF III Liberty Acquisition, LLC and Liberty Group Publishing, Inc.
2.2      Agreement and Plan of Merger and Securities Purchase Agreement, dated May 5, 2006, by and among GateHouse Media, Inc., ENM Merger Sub, Inc., HPM Merger Sub, Inc., ENHE Acquisition, LLC, ENM, Inc., Heritage Partners Media, Inc., Heritage Fund III, L.P., Heritage Fund IIIA, L.P., Heritage Investors III, LLC, Frank E. Richardson, individually and as trustee under certain voting trust agreements, James F. Plugh, Michael H. Plugh, Jennifer V. Plugh, Catherine T. Plugh, Myron F. Fuller, Richard Fuller, Thomas J. Branca, ENHE, LLC and Enterprise NewsMedia Holding, LLC
2.3      Asset Purchase Agreement, dated May 5, 2006, by and among GateHouse Media, Inc., Herald Media, Inc. and CP Media, Inc.
3.1 *    Second Amended and Restated Certificate of Incorporation of GateHouse Media, Inc.
3.2 *    Amended and Restated By-laws of GateHouse Media, Inc.
4.3 *    Form of common stock certificate
4.4 *    Registration Rights Agreement, dated as of                     , 2006, between GateHouse Media, Inc. and FIF III Liberty Holdings LLC
5.1 *    Opinion of Willkie Farr & Gallagher LLP
10.1 *    GateHouse Media Omnibus Stock Incentive Plan
10.2      Liberty Group Publishing, Inc. Publisher’s Deferred Compensation Plan
10.3      Liberty Group Publishing, Inc. Executive Benefit Plan
10.4      Liberty Group Publishing, Inc. Executive Deferral Plan
10.5      Separation and Consulting Agreement, dated as of May 6, 2005, by and among Liberty Group Operating, Inc., Liberty Group Publishing, Inc. and Kenneth L. Serota
10.6 *    Form of Indemnification Agreement to be entered into by GateHouse Media, Inc. with each of its executive officers and directors
10.8      Employment Agreement, dated as of January 3, 2006, by and among GateHouse Media, Inc., GateHouse Media Operating, Inc. and Michael E. Reed
10.9      Employment Agreement, dated as of May 9, 2005, by and among Liberty Group Publishing, Inc., Liberty Group Operating, Inc. and Scott Tracy Champion
10.10      Employment Agreement, dated as of May 9, 2005, by and among Liberty Group Publishing, Inc., Liberty Group Operating, Inc. and Randall W. Cope
10.11      Employment Agreement, dated as of April 19, 2006, by and among GateHouse Media, Inc., GateHouse Media Operating, Inc. and Mark R. Thompson
10.12      Employment Agreement, dated as of May 1, 2006, by and among GateHouse Media, Inc., GateHouse Media Operating, Inc. and Polly G. Sack
10.13      Management Stockholder Agreement, dated as of January 29, 2006, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Michael E. Reed
10.14      Amended and Restated Management Stockholder Agreement, dated as of March 1, 2006, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Scott Champion
10.15      Amended and Restated Management Stockholder Agreement, dated as of March 1, 2006, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Randy Cope
10.16      Management Stockholder Agreement, dated as of June 6, 2005, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Gene Hall


Table of Contents

Exhibit

No.

    

Description of Exhibit

10.17      Management Stockholder Agreement, dated as of June 6, 2005, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Dan Lewis
10.18      Management Stockholder Agreement, dated as of June 6, 2005, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Kelly Luvison
10.19      Management Stockholder Agreement, dated as of May 17, 2006, by and between GateHouse Media, Inc., FIF III Liberty Holdings LLC and Polly G. Sack
10.20      Management Stockholder Agreement, dated as of June 6, 2005, by and between Liberty Group Publishing, Inc., FIF III Liberty Holdings LLC and Gerry Smith
10.21      Management Stockholder Agreement, dated as of May 17, 2006, by and between GateHouse Media, Inc., FIF III Liberty Holdings LLC and Mark R. Thompson
10.22      First Lien Credit Agreement, dated as of June 6, 2006, by and between GateHouse Media Holdco, Inc., GateHouse Media Operating, Inc., GateHouse Massachusetts I, Inc., GateHouse Massachusetts II, Inc., GateHouse Massachusetts III, Inc., the domestic subsidiaries of GateHouse Media Holdco, Inc., as Guarantors, the lenders party thereto, and Wachovia Bank, National Association, as Administrative Agent
10.23      Secured Bridge Credit Agreement, dated as of June 6, 2006, by and between GateHouse Media Holdco, Inc., GateHouse Media Operating, Inc., GateHouse Massachusetts I, Inc., GateHouse Massachusetts II, Inc., GateHouse Massachusetts III, Inc., the domestic subsidiaries of GateHouse Media Holdco, Inc., as Guarantors, the lenders party thereto, and Wachovia Bank, National Association, as Administrative Agent
21         Subsidiaries of GateHouse Media, Inc.
23.1 *    Consent of Willkie Farr & Gallagher LLP (included in the opinion to be filed as Exhibit 5.1 hereto)
23.2      Consent of KPMG LLP with respect to the consolidated financial statements of GateHouse Media, Inc.
23.3      Consent of PricewaterhouseCoopers LLP with respect to the consolidated financial statements of CP Media
23.4      Consent of Grant Thornton LLP with respect to the consolidated financial statements of Enterprise NewsMedia, LLC
23.5      Consent of PricewaterhouseCoopers LLP with respect to the consolidated financial statements of Enterprise NewsMedia, Inc. Enterprise NewsMedia, LLC
24         Powers of Attorney (included on the signature page)

* To be filed by amendment.