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

As filed with the Securities and Exchange Commission on June 29, 2007

Registration No.                       

 


UNITED STATES

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

 


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

  Amount
to be
registered(1)
  Proposed
maximum
offering price(1)(2)
  Proposed
maximum
aggregate
offering price(1)(2)
  Amount of
registration fee

Common Stock, $0.01 par value per share

  19,550,000   $18.83   $368,126,500   $11,301.48


(1) Includes shares which may be issued upon the exercise of the underwriters’ option to purchase additional shares.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based on the average of the high and low prices per share of the registrant’s common stock as reported on the New York Stock Exchange on June 25, 2007.

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.

 



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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 June 29, 2007.

17,000,000 Shares

LOGO

GateHouse Media, Inc.

Common Stock

 


GateHouse Media is offering 17,000,000 shares to be sold in the offering.

The common stock is listed on the New York Stock Exchange under the symbol “GHS.” The last reported price of the common stock on              ,          2007 was $                 per share.

See “Risk Factors” on page 15 to read about factors you should consider before buying shares of our 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

Public offering price

   $             $                     

Underwriting discount

   $             $                     

Proceeds, before expenses, to GateHouse Media

   $             $                     

To the extent that the underwriters sell more than 17,000,000 shares of common stock, the underwriters have a thirty-day option to purchase up to an additional 2,550,000 shares from GateHouse Media at the public offering price less the underwriting discount.

 


The underwriters expect to deliver the shares against payment in New York, New York on                     , 2007.

 

Goldman, Sachs & Co.       Wachovia Securities       Morgan Stanley

 


Bear, Stearns & Co. Inc.

BMO Capital Markets

Lazard Capital Markets

Allen & Company LLC

 


Prospectus dated                 , 2007.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   15

Cautionary Note Regarding Forward-Looking Information

   26

Use of Proceeds

   27

Dividend Policy

   28

Price Range of Common Stock

   29

Capitalization

   30

Dilution

   31

Selected Consolidated Historical and Pro Forma Financial and Other Data

   32

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

   37

Business

   67

Management

   86

Certain Relationships and Related Transactions

   92

Security Ownership of Certain Beneficial Owners and Management

   95

Description of Certain Indebtedness

   97

Description of Capital Stock

   101

Shares Eligible for Future Sale

   104

Material United States Federal Income Tax Considerations

   105

Underwriting

   107

Legal Matters

   112

Experts

   112

Where You Can Find More Information

   114

Incorporation of Documents by Reference

   114

Annex A—Publications

   A-1

Annex B—Websites

   B-1

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 or incorporated by reference 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.

 


 

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Unless the context otherwise requires, in this prospectus:

 

  Ÿ  

“2005 Credit Facility” refers to the term loan and revolving credit facilities that were entered into on February 28, 2005;

 

  Ÿ  

“2006 Credit Facility” refers to the first and second lien term loan credit facilities that were entered into on June 6, 2006, as amended;

 

  Ÿ  

“2006 Financing” refers to the financing transactions contemplated by the 2006 Credit Facility;

 

  Ÿ  

“2006 First Lien Facility” refers to the first lien term loan facility, comprising part of the 2006 Credit Facility, remaining after the repayment and termination of the second lien term loan credit facility;

 

  Ÿ  

“2007 Credit Facility” refers to the amendment and restatement of the 2006 First Lien Facility that was entered into on February 27, 2007;

 

  Ÿ  

“2007 Credit Facility Financing” refers to the financing transactions contemplated by the 2007 Credit Facility;

 

  Ÿ  

“2007 Financings” refers to the financing transactions contemplated by the 2007 Credit Facility, the First Amendment and the Bridge Facility;

 

  Ÿ  

“Bridge Facility” refers to the bridge term loan credit facility that was entered into on April 11, 2007;

 

  Ÿ  

“Bridge Loan” refers to the proceeds of the Bridge Facility;

 

  Ÿ  

“Copley” refers to The Copley Press, Inc.;

 

  Ÿ  

“Copley Acquisition” refers to the acquisition by us of all the stock of certain wholly-owned subsidiaries of Copley and the acquisition by us of certain assets, and the assumption of certain liabilities, of Copley which, taken together, comprised Copley’s midwest (Ohio and Illinois) operations and business;

 

  Ÿ  

“CP Media” and “CNC” refer to CP Media, Inc. and its predecessor entities;

 

  Ÿ  

“CP Media Acquisition” and “CNC Acquisition” refer to the acquisition by us 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 by us of all of the equity interests of Enterprise;

 

  Ÿ  

“First Amendment” refers to the amendment to the 2007 Credit Facility that was entered into on May 7, 2007;

 

  Ÿ  

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

 

  Ÿ  

“GAAP” refers to U.S. generally accepted accounting principles;

 

  Ÿ  

“Gannett” refers to Gannett Co., Inc.;

 

  Ÿ  

“Gannett Acquisition” refers to the acquisition by us of substantially all of the assets, and assumption of certain liabilities, of four daily newspapers and related publications and websites owned by Gannett in Rockford, Illinois; Utica, New York; Norwich, Connecticut; and Huntington, West Virginia;

 

  Ÿ  

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

 

  Ÿ  

“IPO” refers to our initial public offering of 13,800,000 shares of common stock completed on October 30, 2006 (unless the context otherwise indicates, this does not include the 2,070,000 shares of common stock sold pursuant to the exercise of the underwriters’ option to purchase additional shares on November 3, 2006);

 

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  Ÿ  

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

 

  Ÿ  

“Merger” refers to the June 6, 2005 merger pursuant to which FIF III Liberty Holdings LLC, a wholly-owned subsidiary of Fortress, merged with and into the Company, with the Company surviving the merger and Fortress becoming our principal and controlling stockholder;

 

  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 (i) for the three months ended March 31, 2007, the Copley Acquisition, the Gannett Acquisition and the 2007 Financings; (ii) for the three months ended March 31, 2006 and for the year ended December 31, 2006, the Massachusetts Acquisitions, the Copley Acquisition, the Gannett Acquisition and the 2007 Financings; and (iii) for the year ended December 31, 2005, the Merger, the Massachusetts Acquisitions and the 2006 Financing, in each case 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;

 

  Ÿ  

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

 

  Ÿ  

“SureWest” refers to SureWest Directories; and

 

  Ÿ  

“SureWest Acquisition” refers to the acquisition by us of all the equity interests of SureWest.

 


Any data set forth anywhere in this prospectus regarding the number of our products, circulation, facilities, markets or employees is as of March 31, 2007, unless otherwise indicated.

 

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PROSPECTUS SUMMARY

This summary highlights selected information more fully described elsewhere in this prospectus. You should read the entire prospectus carefully, including “Risk Factors,” “Cautionary Note Regarding Forward-Looking Information” and the financial statements and the notes to those statements appearing elsewhere and incorporated by reference in this prospectus, before deciding to invest in our common stock.

GateHouse Media, Inc.

We are one of the largest publishers of locally-focused print and online media in the United States as measured by number of daily publications. Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve. As of May 7, 2007, our portfolio of products, which includes 470 community publications and more than 245 related websites, and seven yellow page directories, served over 173,000 business advertising accounts and reached approximately 10 million people on a weekly basis. Our total pro forma revenue and pro forma income (loss) from continuing operations for the year ended December 31, 2006 were $643.9 million and $(28.9) million, respectively. Our total pro forma revenue and pro forma income (loss) from continuing operations for the three months ended March 31, 2007 were $154.1 million and $(13.3) million, respectively.

Our core products include:

 

  Ÿ  

87 daily newspapers with total paid circulation of approximately 818,000;

 

  Ÿ  

248 weekly newspapers (published up to three times per week) with total paid circulation of approximately 538,000 and total free circulation of approximately 691,000;

 

  Ÿ  

135 “shoppers” (generally advertising-only publications) with total circulation of approximately 2.5 million;

 

  Ÿ  

over 245 locally focused websites, which extend our franchises onto the internet; and

 

  Ÿ  

seven yellow page directories with a distribution of approximately 758,000 that covers a population of approximately two million people.

In addition to our core products, we also opportunistically produce niche publications that address specific local market interests such as recreation, sports, healthcare and real estate. Over the last 12 months, we created 79 niche publications.

Our print and online products focus on the local community from both a content and advertising standpoint. As a result of our focus on small and midsize markets, we are usually the primary, and sometimes 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.

More than 70% of our daily newspapers have been published for more than 100 years and 90% 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. As a result of these factors, our publications have high audience penetration rates in our markets, thereby providing advertisers with strong local market reach.

 

 

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A key element of our business and acquisition 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 believe that this discipline, together with the generally lower overhead costs associated with operating in small and midsize markets, will allow us to expand our operating profit margins. We define operating profit as total revenue less operating costs and selling, general and administrative costs.

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 and cash flow per share through a combination of (i) organic growth in our existing portfolio, (ii) disciplined acquisitions of additional assets and operating companies within the highly fragmented local media industry and (iii) the realization of economies of scale and operating efficiencies.

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 in the communities we serve as the leading, and often sole, provider of comprehensive and in-depth local content. This has resulted in strong reader loyalty 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.    The concentrated local focus of our portfolio provides advertisers with a targeted audience with whom they can communicate directly, thereby maximizing the efficiency of their advertising spending. 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.

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. As of May 7, 2007, we generated revenue in 335 markets across 20 states, serving a fragmented and diversified local advertising customer base. We served over 173,000 business advertising accounts in our publications, and our top 20 advertisers contributed less than 5% of our pro forma total revenues in 2006. Over 1.8 million classified advertisements were placed in our publications in 2006. Additionally, over 1.2 million and 750,000 classified advertisements were placed in 2006 in the publications we acquired from Copley and Gannett, respectively.

Scale Yields Higher Operating Profit Margins and Allows Us to Realize Operating Synergies.    We believe we generate higher operating profit margins than our publications could achieve on a stand-alone basis by leveraging our operations and implementing revenue initiatives across a broader local footprint in a geographic cluster and by centralizing our corporate and administrative operations. 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, operating profit margins, low capital expenditures and working capital requirements and currently favorable tax position. Although a substantial portion of our cash flow from operations must be used to service our indebtedness, we expect to have the ability to continue to pay regular quarterly dividends.

 

 

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Strong Track Record of Acquiring and Integrating New Assets.    We have created a national platform for consolidating local media businesses and have demonstrated an ability to improve the performance of the publications we acquire through sound management, including revenue generating and direct cost saving initiatives. Since 1998 through December 31, 2006, we have invested over $684.0 million to acquire 278 publications in 42 transactions that contributed an aggregate of 73.2% of our total revenue in 2006. We increased trailing 12-month Adjusted EBITDA at those publications from $59.1 million at the time of acquisition to $67.0 million in 2006. In addition, from January 1, 2007 through May 7, 2007 we have invested $1.0 billion to acquire an additional 65 publications. Our SureWest Acquisition has expanded our portfolio to include four yellow page directories in and around the Sacramento, California area. Future acquisitions may expose us to additional business and financial risks, which may adversely affect our ability to successfully integrate acquired businesses.

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 plan to grow our revenue and cash flow per share through a combination of (i) organic growth in our existing portfolio, (ii) disciplined acquisitions of additional assets and operating companies within the highly fragmented local media industry and (iii) the realization of economies of scale and operating efficiencies. 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.

Pursue a Disciplined and Accretive Acquisition Strategy in Existing and New Markets. The local media industry is highly fragmented and we believe we have a strong platform for creating additional shareholder value. We evaluate acquisitions on an ongoing basis and intend to pursue acquisitions of locally-focused media businesses, including directories (where we have made a recent acquisition), traders, broadcasters, outdoor advertisers, direct mail and web site operators, 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, are large enough to form the basis of a new cluster, or provide a platform for entry into new markets or locally focused media products.

Leverage Benefits of Scale and Clustering to Increase Cash Flows and Operating Profit Margins. We intend to 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 increase our cash flows and expand our operating 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. We believe that our established positions in local markets, combined with our publishing and distribution capabilities, allow us to develop and customize new products to address the evolving interests and needs of our readers and advertisers. These products are often specialty publications

 

 

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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 (where we have made a recent acquisition), 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 believe that 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 this presents an opportunity to increase our overall 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. Our approach includes ongoing company-wide training of sales representatives and sales managers with training programs that focus on strengthening their ability to gather relevant demographic information, present to customers, effectively utilize time and close on sales calls.

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, traders, 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 $101 billion in 2006, or approximately 35% of the entire U.S. advertising market.

The U.S. community newspaper industry is large and highly fragmented. According to Dirks, Van Essen & Murray, more than 1,200 of the more than 1,400 daily newspapers in the United States have circulations of less than 50,000, which we generally define as local or community newspapers, and there are only five companies (including GateHouse) that own more than 50 daily 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 (where we have made a recent acquisition), 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 generally produce stable revenues and operating profit margins as a result of these competitive dynamics and the value created for advertisers by hyper-local content and community relationships.

Recent Developments

On June 6, 2006, we consummated the Massachusetts 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 through the purchase of the entities directly and indirectly owning such equity interests. CNC and Enterprise were the two largest community newspaper companies in Massachusetts. The publications acquired in the Massachusetts Acquisitions include six dailies, 115 weeklies, 10 shoppers and numerous specialty publications that serve communities in eastern Massachusetts and now comprise the core of our Northeast region. The operations of CNC and Enterprise contributed $173.9 million to our total pro forma revenue of $643.9 million for the 12 months ended December 31, 2006. For additional information concerning the products acquired in the Massachusetts Acquisitions and our Northeast region, see “Business—Overview of Operations—Northeast Region.”

On October 30, 2006, the Company completed its IPO of 13,800,000 shares of common stock at $18.00 per share. On November 3, 2006, the IPO underwriters exercised their option to purchase an additional 2,070,000 shares of common stock from us. The total net proceeds from the IPO, including from the exercise of the underwriters’ option to purchase additional shares, were $261.6 million.

During January 2007, we acquired an additional 24 publications for an aggregate purchase price of approximately $23.8 million. The acquisitions include one daily, 13 weeklies and 10 shopper publications with an aggregate circulation of approximately 292,000.

In February 2007, we completed our acquisition of eight publications from the Journal Register Company for a net purchase price of approximately $70.0 million plus approximately $2.0 million of working capital. The acquisition included two daily and four weekly newspapers and two shoppers, serving southeastern Massachusetts with an aggregate circulation of approximately 122,000.

In February 2007, we completed our purchase of all the issued and outstanding capital stock of SureWest from SureWest Communications for a net purchase price of $106.5 million, plus $3.5 million of working capital. SureWest is engaged in the business of publishing yellow page and white page directories in and around the Sacramento, California area and provides internet yellow pages through the sacramento.com website. As a result of this acquisition, we became the publisher of the official directory of SureWest Telephone.

In order to finance the SureWest Acquisition and to obtain financing for other anticipated acquisitions, in February 2007 we amended and restated our 2006 Credit Facility to provide for a (i) $670.0 million term loan facility, (ii) delayed draw term loan facility of up to $250.0 million and (iii) $40.0 million revolving credit facility. We refer to this amended and restated credit facility as the 2007 Credit Facility. For additional information about the 2007 Credit Facility, see “Description of Certain Indebtedness.”

In April 2007, we completed our acquisition of 15 publications from Copley for a net purchase price of $380.0 million plus working capital adjustments of approximately $1.6 million. The acquisition includes seven daily and two weekly newspapers, and six shoppers, serving areas of Ohio and Illinois with an aggregate circulation of approximately 465,000.

 

 

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In order to finance the Copley Acquisition and to obtain financing for other anticipated acquisitions, in April 2007 we entered into a $300.0 million term loan facility which we refer to as the Bridge Facility. For additional information about the Bridge Facility, see “Description of Certain Indebtedness.”

In May 2007 we completed our acquisition of 13 publications from Gannett for a net purchase price of approximately $410 million plus working capital adjustments of approximately $9.8 million. The acquisition includes four daily and three weekly newspapers, and six shoppers, serving Rockford, Illinois, Utica, New York, Norwich, Connecticut and Huntington, West Virginia with an aggregate circulation of approximately 457,000.

In order to finance the Gannett Acquisition, in May 2007 we entered into an amendment to the 2007 Credit Facility to provide for an incremental term loan facility of $275.0 million, which we refer to as the First Amendment. For additional information about the First Amendment, see “Description of Certain Indebtedness.”

As of May 7, 2007, we had a total of $1.195 billion of term loans outstanding under the 2007 Credit Facility (including the delayed draw term loan facility which has been fully drawn), as amended by the First Amendment, and $300.0 million of term loans outstanding under our Bridge Facility. We intend to use a portion of the net proceeds of this offering to repay the Bridge Loan. Affiliates of three of the underwriters, Goldman, Sachs & Co., Wachovia Capital Markets, LLC and Morgan Stanley & Co. Incorporated, are lenders under our Bridge Facility. As a result, affiliates of the underwriters may receive more than 10% of the entire net proceeds of this offering. See “Use of Proceeds.”

In May 2007 we announced a partnership with Yahoo! HotJobs as part of a larger local media consortium to provide recruitment advertising services to each of our daily, and more than 160 of our weekly, newspapers nationwide. Our addition to the consortium significantly expands the number of local newspapers that have teamed with Yahoo! HotJobs to advance this leading recruitment brand, and it further highlights our commitment to our online strategy. We have also partnered with Google on their AdSense and PrintAds programs.

In June 2007, we signed a definitive agreement to sell The Herald Dispatch and related publications (initially acquired in the Gannett Acquisition) which are located in Huntington, West Virginia, to Champion Industries, Inc. for a purchase price of $77 million. The sale is expected to be consummated before the end of August 2007 and is subject to regulatory approval and customary closing conditions. We intend to use the proceeds from this sale to pay down debt on our 2007 Credit Facility.

Our Principal Stockholder

Fortress is a leading global alternative investment management firm founded in 1998 with approximately $36.0 billion of equity capital currently under management. Fortress is headquartered in New York City and has affiliates with offices in Dallas, San Diego, Atlanta, Toronto, London, Rome, Frankfurt, Sydney and Hong Kong. Fortress manages capital for a diverse group of investors, including pension funds, university endowments and foundations, financial institutions, funds-of-funds and high-net-worth individuals. To date, the Fortress funds have contributed approximately $220.5 million in equity capital to us.

As of March 31, 2007, Fortress beneficially owned approximately 57.8% of our outstanding common stock. Following the completion of this offering, Fortress will beneficially own approximately 40.3% of our outstanding common stock, or 38.6% if the underwriters’ option to purchase additional

 

 

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shares is fully exercised. Fortress is not selling any shares of common stock in this offering. As a result of its ownership, Fortress will continue to have effective control over fundamental and significant corporate matters and transactions. See “Risk Factors—Risks Related to Our Organization and Structure.” We are also party to an Investor Rights Agreement with Fortress pursuant to which Fortress has the right to nominate up to three of our seven directors even after it owns less than a majority of our outstanding common stock. See “Certain Relationships and Related Transactions—Investor Rights Agreement—Nomination of Directors.”

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

17,000,000 shares.

 

Underwriters’ option to purchase additional shares

2,550,000 shares.

 

Common stock to be outstanding after the offering

56,158,880 shares.

 

Use of proceeds

We expect to use the net proceeds from this offering to repay in full our $300 million Bridge Loan and for general corporate purposes. Affiliates of three of the underwriters, Goldman, Sachs & Co., Wachovia Capital Markets, LLC and Morgan Stanley & Co. Incorporated, are lenders under the Bridge Facility. As a result, affiliates of these underwriters may receive more than 10% of the entire net proceeds of this offering. See “Use of Proceeds.”

 

Dividend policy

For the fourth quarter of 2006, we paid a partial dividend of $0.08 per share of common stock in October 2006, and an additional partial dividend of $0.24 per share of common stock in January 2007 to stockholders of record on December 29, 2006, for a total fourth quarter dividend of $0.32 per share of common stock, or an aggregate of approximately $11.2 million.

 

For the first quarter of 2007, we paid a regular quarterly dividend of $0.37 per share of common stock on April 16, 2007, to stockholders of record as of March 30, 2007, or an aggregate of approximately $14.5 million.

 

 

For the second quarter of 2007, our board of directors declared a quarterly dividend of $0.40 per share of common stock payable on July 16, 2007, to stockholders of record as of June 29, 2007, or an aggregate of approximately $15.7 million.

 

 

These dividends may not be indicative of the amount of any future dividends.

 

 

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, our earnings, general business conditions, restrictions imposed by our financing arrangements (including our 2007 Credit Facility and our Bridge 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.

 

 

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As a holding company with no direct operations, we depend on loans, dividends and other payments from our subsidiaries to generate the funds necessary to pay dividends to the holders of our common stock, and our subsidiaries may be prohibited or restricted from paying dividends to us or otherwise making funds available to us under certain conditions, including restrictions imposed by our 2007 Credit Facility and our Bridge Facility. See “Description of Certain Indebtedness.” We expect that for the foreseeable future we will pay dividends in excess of our net income for such period as determined in accordance with U.S. generally accepted accounting principles, or GAAP, if we are able to generate Adjusted EBITDA in excess of scheduled debt payments, capital expenditure requirements, cash income taxes and cash interest expense in amounts sufficient to permit our subsidiaries to pay dividends to us under our 2007 Credit Facility and our Bridge Facility.

Based upon our forward-looking results of operations, expected cash flows and anticipated operating efficiencies to be realized through our clustering strategy, we currently expect to be in compliance with all of the debt covenants under our 2007 Credit Facility and our Bridge Facility and have the ability to pay regular quarterly dividends. However, our forward-looking results, expected cash flows and realization of incremental operating efficiencies are subject to risks and uncertainties described under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Information.”

 

New York Stock Exchange symbol

“GHS”.

 

Risk factors

Please read the section entitled “Risk Factors” beginning on page 15 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, assumes that the underwriters’ option to purchase additional shares, which entitles the underwriters to purchase up to 2,550,000 additional shares of our common stock from us, is not exercised.

 

 

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Summary Historical Consolidated and Pro Forma Financial Data

Our summary historical financial data 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 incorporated by reference in this prospectus. Our summary historical financial data as of December 31, 2003 and 2004 and for the year ended December 31, 2003 have been derived from the audited financial statements of the Predecessor not included in this prospectus. Our summary historical financial data as of December 31, 2005, for the period from June 6, 2005 to December 31, 2005, and as of and for the fiscal year ended December 31, 2006 have been derived from the audited consolidated financial statements of the Successor incorporated by reference in this prospectus. Our summary historical financial data as of and for the three-month periods ended March 31, 2006 and 2007 have been derived from the unaudited condensed consolidated financial statements of the Successor incorporated by reference 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.

Our summary pro forma condensed consolidated statement of operations data for the year ended December 31, 2006 gives effect to the Massachusetts Acquisitions, the Copley Acquisition, the Gannett Acquisition (excluding revenue and expenses related to the group of assets and liabilities held for sale) and the 2007 Financings, as if they had occurred on January 1, 2006. Our summary pro forma condensed consolidated statement of operations data for the three-month period ended March 31, 2007 gives effect to the Copley Acquisition, the Gannett Acquisition (excluding revenue and expenses related to the group of assets and liabilities held for sale) and the 2007 Financings as if they had occurred on January 1, 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 Massachusetts Acquisitions, the Copley Acquisition, the Gannett Acquisition and the 2007 Financings, had occurred on January 1, 2006. The summary pro forma condensed consolidated financial data also should not be considered representative of our future financial condition or results of operations.

Our summary pro forma, as adjusted condensed consolidated statement of operations data for the year ended December 31, 2006 gives effect to the Massachusetts Acquisitions, the Copley Acquisition, the Gannett Acquisition, the 2007 Financings, this offering and the application of a portion of the net proceeds of this offering to repay the Bridge Loan as if they occurred on January 1, 2006. Our summary pro forma, as adjusted condensed consolidated balance sheet data as of March 31, 2007 and our summary pro forma, as adjusted condensed consolidated statement of operations data for the three-month period ended March 31, 2007 gives effect to the Copley Acquisition, the Gannett Acquisition, the 2007 Financings, this offering and the application of a portion of the net proceeds of this offering to repay the Bridge Loan, as if they occurred on March 31, 2007 and January 1, 2006, respectively.

 

 

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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

 

Year

Ended
December 31,
2006

   

Three
Months
Ended

March 31,
2006

  Three
Months
Ended
March 31,
2007
        

Year

Ended

December 31,
2006

   

Three
Months
Ended
March 31,

2007

   

Year

Ended

December 31,
2006

   

Three
Months
Ended
March 31,

2007

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

(Successor)

    (Successor)   (Successor)          (Pro Forma)     (Pro Forma)     (Pro Forma,
as Adjusted)
    (Pro Forma,
as Adjusted)
 
    (in thousands, except share and per share data)          (in thousands, except share and per share data)  

Statement of Operations Data:

                         

Revenues:

                         

Advertising

  $ 139,258     $ 148,291     $ 63,172     $ 88,798   $ 238,721     $ 36,459   $ 71,248         $ 476,475     $ 111,354     $ 476,475     $ 111,354  

Circulation

    31,478       34,017       14,184       19,298     52,656       8,495     17,257           129,920       32,860       129,920       32,860  

Commercial printing and other

    11,645       17,776       8,134       11,415     23,553       5,021     6,479           37,459       9,874       37,459       9,874  
                                                                                       

Total revenues

    182,381       200,084       85,490       119,511     314,930       49,975     94,984           643,854       154,088       643,854       154,088  
                                                                                       

Operating income

    30,204       34,279       5,026       17,635     32,627       3,374     2,053           67,755       6,127       67,755       6,127  

Income (loss) from continuing operations

    (14,650 )     (30,711 )     (24,831 )     9,565     (1,574 )     405     (6,079 )         (28,938 )     (13,250 )     (16,488 )     (10,138 )

Net income (loss) available to common stockholders

  $ (26,573 )   $ (26,085 )   $ (24,831 )   $ 9,565   $ (1,574 )   $ 405   $ (6,079 )       $ (28,938 )   $ (13,250 )   $ (16,488 )   $ (10,138 )

Basic weighted-average shares outstanding(1)

    215,883,300       215,883,300       215,883,300       22,197,500     25,087,535       22,214,445     38,097,167           25,087,535       38,097,167       41,598,401       54,608,033  

Diluted weighted-average shares outstanding(1)

    215,883,300       215,883,300       215,883,300       22,444,038     25,087,535       22,464,996     38,097,167           25,087,535       38,097,167       41,598,401       54,608,033  

Basic earnings (loss) per share available to common stockholders(1)

  $ (0.12 )   $ (0.12 )   $ (0.12 )   $ 0.43   $ (0.06 )   $ 0.02   $ (0.16 )       $ (1.15 )   $ (0.35 )   $ (0.40 )   $ (0.19 )

Diluted earnings (loss) per share available to common stockholders(1)

  $ (0.12 )   $ (0.12 )   $ (0.12 )   $ 0.43   $ (0.06 )   $ 0.02   $ (0.16 )       $ (1.15 )   $ (0.35 )   $ (0.40 )   $ (0.19 )

Statement of Cash Flows Data:

                         

Other Data:

                         

(unaudited)

                         

Adjusted EBITDA(2)

  $ 43,563     $ 49,153     $ 18,505     $ 28,515   $ 57,595     $ 6,973   $ 11,179         $ 127,870     $ 21,448     $ 127,870     $ 21,448  

Cash interest paid

  $ 22,754     $ 24,210     $ 16,879     $ 31,720   $ 38,459     $ 6,598   $ 9,284              

Capital expenditures

  $ 2,141     $ 3,654     $ 1,015     $ 4,967   $ 8,396     $ 2,886   $ 2,018              

(1) All share and per share data has been computed as if the 100-for-1 stock split had occurred as of the beginning of each of the applicable periods presented.

 

 

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(2) We define Adjusted EBITDA as net income (loss) from continuing operations before income tax expense (benefit), depreciation and amortization 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. Adjusted EBITDA provides an indicator for management to determine if adjustments to current spending decisions are needed.

 

   Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation and interest expense associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the short-term, namely 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

   

Year Ended
December
31, 2006

   

Three
Months
Ended
March 31,
2006

   

Three
Months
Ended

March 31,
2007

    Year Ended
December 31,
2006
    Three
Months
Ended
March 31,
2007
    Year Ended
December 31,
2006
   

Three
Months
Ended

March 31,
2007

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

Income (loss) from continuing operations

  $ (14,650 )   $ (30,711 )   $ (24,831 )   $ 9,565     $ (1,574 )   $ 405     $ (6,079 )   $ (28,938 )   $ (13,250 )   $ (16,488 )   $ (10,138 )

Income tax expense (benefit)

    (4,691 )     1,228       (3,027 )     7,050       (3,273 )     368       (2,486 )     (13,953 )     (7,081 )     (5,943 )     (5,078 )

Write-off of deferred offering costs

    1,935       —         —         —         —         —         —         —         —         —         —    

Write-off of deferred financing costs

    161       —         —         —         —         —         —         —         —         —         —    

Unrealized (gain) loss on derivative instrument

    —         —         —         (10,807 )     (1,150 )     (2,605 )     383       (1,150 )     383       (1,150 )     383  

Loss on early extinguishment of debt

    —         —         5,525       —         2,086       —         —         3,449       —         3,449       —    

Amortization of deferred financing costs

    1,810       1,826       643       67       544       30       223       4,397       317       4,397       317  

Interest expense—dividends on mandatorily redeemable preferred stock

    13,206       29,019       13,484       —         —         —         —         —         —         —         —    

Interest expense—debt

    32,433       32,917       13,232       11,760       35,994       5,176       10,217       103,933       25,983       83,473       20,868  

Impairment of long-lived assets

    —         1,500       —         —         917       —         119       917       119       917       119  

Transaction costs related to Merger and the Massachusetts Acquisitions

    —         —         7,703       2,850       —         —         —         4,420       —         4,420       —    

Depreciation and amortization

    13,359       13,374       5,776       8,030       24,051       3,599       8,802       54,795       14,977       54,795       14,977  
                                                                                         

Adjusted EBITDA

  $ 43,563 (a)   $ 49,153 (b)   $ 18,505 (c)   $ 28,515 (d)   $ 57,595 (e)   $ 6,973 (f)   $ 11,179 (g)   $ 127,870 (h)(i)   $ 21,448 (j)(i)   $ 127,870     $ 21,448  
                                                                                         

(a) Adjusted EBITDA for the year ended December 31, 2003 includes a total of $1,610 net expense, which is comprised of non-cash compensation and other expense of $26, management fees paid to prior owners of $1,480 and a loss of $104 on the sale of assets.

 

(b) Adjusted EBITDA for the year ended December 31, 2004 includes a total of $1,076 net expense, which is comprised of management fees paid to prior owners of $1,480 and a loss of $30 on the sale of assets, partially offset by $434 of other income.

 

(c) Adjusted EBITDA for the period from January 1, 2005 to June 5, 2005 includes a total of $1,564 net expense, which is comprised of non-cash compensation and other expense of $796 and management fees paid to prior owners of $768.

 

 

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(d) Adjusted EBITDA for the period from June 6, 2005 to December 31, 2005 includes a total of $1,643 net expense, which is comprised of non-cash compensation and other expense of $681 and integration and reorganization costs of $1,002, which are partially offset by a $40 gain on the sale of assets.

 

(e) Adjusted EBITDA for the year ended December 31, 2006 includes a total of $11,109 net expense, which is comprised of non-cash compensation and other expense of $5,175, non cash portion of postretirement benefit expense of $748, integration and reorganization costs of $4,486 and a $700 loss on the sale of assets.

 

(f) Adjusted EBITDA for the three months ended March 31, 2006 includes a total of $2,855 net expense, which is comprised of non-cash compensation and other expense of $704, integration and reorganization costs of $1,710 and a $441 loss on the sale of assets.

 

(g) Adjusted EBITDA for the three months ended March 31, 2007 includes a total of $4,333 net expense, which is comprised of non-cash compensation and other expense of $2,153, non-cash portion of postretirement benefits expense of $314, integration and reorganization costs of $838, a $13 loss on the sale of assets and the impact of SureWest purchase accounting of $1,015.

 

(h) Pro forma Adjusted EBITDA for the year ended December 31, 2006 includes a total of $27,803 net expense, which is comprised of non-cash compensation and other expense of $6,927, non-cash portion of postretirement benefits expense of $1,615, lease abandonment costs and amortization of prepaid rent at CP Media of $270, integration and reorganization costs of $6,729, a $700 loss on the sale of assets, pension, health and supplemental employee retirement plan expenses of $1,727 (these plans were not assumed in the acquisition by GateHouse), corporate and third party charges not assumed by GateHouse of $6,419 and severance expense of $3,416.

 

(i) Excludes revenue and expenses related to the group of assets and liabilities from the Gannett Acquisition held for sale.

 

(j) Pro forma Adjusted EBITDA for the three months ended March 31, 2007 includes a total of $7,527 net expense, which is comprised of non-cash compensation and other expense of $2,346, non-cash portion of postretirement benefits expense of $314, integration and reorganization costs of $838, a $13 loss on the sale of assets, the impact of SureWest purchase accounting of $1,015, pension, health and supplemental employee retirement plan expenses of $340 (these plans were not assumed in the acquisition by GateHouse), corporate and third party charges not assumed by GateHouse of $1,796 and severance expense of $865.

 

     As of December 31,  

As of
March 31,

2007

      

As of

March 31,

2007

 

As of

March 31,

2007

     2003     2004     2005    2006        
     (Predecessor)     (Predecessor)     (Successor)    (Successor)   (Successor)        (Pro Forma)   (Pro Forma,
as Adjusted)
     (in thousands)            (in thousands)

Balance Sheet Data:

                   

Total assets

   $ 492,349     $ 488,176     $ 638,726    $ 1,167,723   $ 1,288,300       $ 2,153,796   $ 2,159,554

Total long-term obligations, including current maturities

     582,241       602,003       313,655      559,811     693,737         1,499,954     1,199,954

Stockholders’ equity (deficit)

     (139,492 )     (165,577 )     232,056      473,084     451,231         451,231     758,214

 

 

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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.

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 on our profitability.

Our advertising revenues and, to a lesser extent, circulation revenues, depend upon a variety of factors specific to the communities that our publications serve. These factors include, among others, the size and demographic characteristics of the local population, local economic conditions in general and the economic condition of the retail segments of the communities that our publications serve. If the local economy, population or prevailing retail environment of a community we serve experiences a downturn, our publications, revenues and profitability in that market could be adversely affected. Our advertising revenues are also susceptible to negative trends in the general economy 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 a significant amount of indebtedness. At March 31, 2007, after giving pro forma effect to the 2007 Financings and the use of a portion of the net proceeds of this offering to repay the Bridge Loan, we would have had total indebtedness of $1.195 billion. After giving pro forma effect to the 2007 Financings and the use of a portion of the net proceeds of this offering to repay the Bridge Facility, our pro forma interest expense for the year ended December 31, 2006 would have been $83.5 million. Loans under the 2007 Credit Facility, as amended by the First Amendment, and the Bridge Facility are subject to a floating interest rate. An aggregate of $1.12 billion of term loans under our 2007 Credit Facility, as amended by the First Amendment, were hedged through the execution of interest rate hedge agreements of $300.0, $550.0 and $270.0 million, at fixed rates of 4.135%, 5.041% and 5.359%, through June 2012, September 2014 and July 2011, respectively.

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, limiting our ability to maintain the value of our assets and operations; 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.

 

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In addition, our 2007 Credit Facility and our Bridge Facility contain, 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 2007 Credit Facility, our Bridge 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 2007 Credit Facility and our Bridge Facility prohibit us from making dividend payments on our common stock if we are not in compliance with our restricted 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 2007 Credit Facility and our Bridge Facility or other indebtedness we may have. If we were unable to repay those amounts, the lenders under our 2007 Credit Facility or our Bridge Facility could proceed against the security granted to them to secure that indebtedness. If the lenders accelerate the payment of our indebtedness under our 2007 Credit Facility or our Bridge Facility or other indebtedness, if any, our assets may not be sufficient to repay in full such indebtedness.

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

We paid dividends on our common stock for the last quarter of 2006 and the first quarter of 2007, and our board of directors has declared a dividend to be paid for the second quarter of 2007. See “Dividend Policy.” We intend to continue 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, the degree to which we are or become leveraged, contractual restrictions binding on us, provisions of applicable law and other factors that our board of directors may deem relevant. In addition, our 2007 Credit Facility and our Bridge Facility contain 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 our 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 continue 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.

 

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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 (where we have made a recent acquisition), traders and direct mail. We evaluate potential acquisitions on an ongoing basis and from time-to-time are actively pursuing acquisition opportunities. 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, vendors, service providers, 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 we do. We anticipate that we may finance acquisitions through cash provided by operating activities, additional borrowings under possible future amendments to our 2007 Credit Facility and other indebtedness, which would reduce our cash available for other purposes, including the repayment of indebtedness and payment of dividends.

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

The basic raw material for our publications is newsprint. We generally maintain only a 30-day inventory of newsprint, although our participation in a newsprint-buying consortium helps ensure adequate supply. An inability to obtain an adequate supply of newsprint at a favorable price or at all in the future could have a material adverse effect on our ability to produce our publications. Historically, the price of newsprint has been volatile, reaching a high of approximately $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 2006 was approximately $662 per metric ton but declined to $623 per metric ton in the first quarter of 2007. Recent and future consolidation of major newsprint suppliers may adversely affect price competition among suppliers. Significant increases in newsprint costs could have a material adverse effect on our financial condition and results of operations. See “Business—Newsprint.”

 

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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.

According to the Newspaper Association of America, overall daily newspaper circulation, including national and urban newspapers, has declined at an average annual rate of 0.8% during the three-year period from 2002 to 2004. 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 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 have a history of losses and may not be able to achieve or maintain profitable operations in the future.

We experienced losses from continuing operations of approximately $13.3 million on a pro forma basis in the first quarter of 2007 and $28.9 million and $14.1 million on a pro forma basis in 2006 and 2005, respectively, and $30.7 million in 2004. Pro forma loss from continuing operations in 2006 included lease abandonment charges of $0.3 million, postretirement benefits expense of $1.6 million and integration and reorganization costs of $6.7 million. Pro forma loss from continuing operations in 2005 included severance, lease abandonment charges and consulting expense paid to our prior management of $1.5 million in the aggregate. In addition, pro forma 2005 loss from continuing operations includes non-cash pension and post retirement benefits expense of $1.1 million, $0.8 million of consulting expense related to financial systems integration and $0.1 million in reorganization

 

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expense. Losses from continuing operations in 2004 included management fee expense of $1.5 million paid to our prior owner. Our results of operations in the future will depend on many factors, including our ability to execute our business strategy and realize efficiencies through our clustering strategy. Our failure to achieve profitability in the future could adversely affect the trading price of our common stock and our ability to raise additional capital and, accordingly, our ability to grow our business.

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 R. 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 would require our remaining key personnel to divert immediate and substantial attention to seeking a replacement. An inability to find a suitable replacement for any departing executive officer on a timely basis could adversely affect our ability to operate 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 stockholders from influencing significant corporate decisions and the interests of our principal stockholder may conflict with interests of our other stockholders.

Following the completion of this offering, Fortress will beneficially own approximately 40.3% of our outstanding common stock, or 38.6% if the underwriters’ option to purchase additional shares is fully exercised. As a result, Fortress will continue to have effective control over 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 our dissolution. The interests of Fortress may not always coincide with our interests or the interests of our other stockholders. 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 transaction. 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.”

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.

Fortress, together with its affiliates, has other business activities in addition to their ownership of us. 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 our affiliates.

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.

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 stockholders 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 stockholders 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 can hinder takeover attempts, including:

 

  Ÿ  

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

 

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  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% 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.

Our 2007 Credit Facility and Bridge Facility currently limit our ability to enter into certain change of control transactions, the occurrence of which would constitute an event of default under such credit facilities. 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 2007 Credit Facility, which imposes restrictions on their ability to make loans, dividend payments or other payments to us. Any payment of dividends to us are subject to the satisfaction of certain financial conditions set forth in our 2007 Credit Facility and our Bridge Facility. Our ability to comply with these conditions 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, which could have an adverse effect on our operations, business, securities and ability to comply with applicable regulations and requirements.

On April 20, 2006, we received a letter from KPMG LLP, our then 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.

 

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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 group consisting of more than 10 corporate accounting professionals and more than 15 shared services accounting professionals, many of whom have public company experience. The Massachusetts Acquisitions, the Copley Acquisition and the Gannett Acquisition 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 and believe we have adequately addressed them, 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 or if we are unable to scale these systems to our growth, our ability to record, process, summarize and report financial information within the time periods specified in the rules and forms of the SEC may be adversely affected. This failure could materially and adversely impact our business, our financial condition and the market value of our securities and could result in the imposition of sanctions, including the suspension or delisting of our common stock from the New York Stock Exchange, the inability of registered broker dealers to make a market in our common stock, or investigation by regulatory authorities. Further and continued determinations that there are significant deficiencies or material weaknesses in the effectiveness of our internal controls over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures to comply with applicable requirements.

No material weaknesses were identified by KPMG LLP for the year ended December 31, 2006.

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

As a public company, we are 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

 

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attention from other business concerns. Since the IPO, our costs have and 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 required us, among other things, to establish an internal audit function.

Risks Related to this Offering

The market price and trading volume of our common stock may be volatile or may decline regardless of our operating performance, which could result in rapid and substantial losses for our stockholders.

Our common stock has been publicly traded since October 2006 and we cannot predict the extent to which a trading market for our common stock will further develop or be sustained. In addition, the trading volume in our common stock may fluctuate, causing significant price variations to occur. If the market price or the trading volume of our common stock declines significantly, you may be unable to resell your shares at or above the public offering price.

The market price or trading volume of our common stock could be highly volatile and may decline significantly in the future in response to various factors, many of which are beyond our control, including:

 

  Ÿ  

variations in our quarterly or annual 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.

These factors could cause our common stock to trade at prices below the public offering price, which could prevent you from selling your common stock at or above the 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 further increase our capital resources by offering debt or additional equity securities, including commercial paper, medium-term notes, senior or subordinated

 

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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 option to purchase additional shares, we will have an aggregate of 89,465,200 shares of common stock authorized but unissued and not reserved for issuance under the GateHouse Media, Inc. Omnibus Stock Incentive Plan. 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 common stock.

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 56,158,880 shares of common stock outstanding, or 58,708,880 shares outstanding if the underwriters exercise their option to purchase additional shares 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 an investor 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 22,650,000 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, on October 26, 2006, we filed a registration statement on Form S-8 under the Securities Act to register an aggregate of 2,000,000 shares of common stock reserved for issuance under the GateHouse Media, Inc. Omnibus Stock Incentive Plan (which amount increased to 2,100,000 shares effective January 1, 2007). Subject to any 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 are 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 share 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 share 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.

 

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You will incur immediate and substantial dilution.

The public offering price is 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.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

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

Forward-looking statements are based on management’s current expectations and beliefs and are subject to a number of known and unknown risks, uncertainties and other factors that could lead to actual results materially different from those described in the forward-looking statements. We can give no assurance that our expectations will be attained. Factors that could cause actual results to differ materially from our expectations include, but are not limited to the risks identified by us under the heading “Risk Factors” and elsewhere in this prospectus. Such forward-looking statements speak only as of the date on which they are made. Except to the extent required by law we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of shares of common stock in the offering, based on the offering price of $             per share, will be approximately $             million, or $             million, if the underwriters exercise their option to purchase additional shares in full, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use these net proceeds to repay in full the $300 million of borrowings under our Bridge Loan (including accrued and unpaid interest) incurred in connection with the Copley Acquisition and the Gannett Acquisition, and for general corporate purposes. Affiliates of three of the underwriters, Goldman, Sachs & Co., Wachovia Capital Markets, LLC and Morgan Stanley & Co. Incorporated are lenders under the Bridge Loan. As a result, affiliates of these underwriters may receive more than 10% of the entire net proceeds of this offering. As of April 30, 2007, the interest rate applicable to the Bridge Loan was 6.82%. The Bridge Loan matures on April 11, 2015. This loan can be prepaid without penalty.

 

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DIVIDEND POLICY

For the fourth quarter of 2006, we paid a partial dividend of $0.08 per share of common stock in October 2006, and an additional partial dividend of $0.24 per share of common stock in January 2007 to stockholders of record on December 29, 2006, for a total fourth quarter dividend of $0.32 per share of common stock, or an aggregate of approximately $11.2 million. For the first quarter of 2007, we paid a regular quarterly dividend of $0.37 per share of common stock to stockholders of record as of March 30, 2007, or an aggregate of approximately $14.5 million. For the second quarter of 2007, our board of directors declared a quarterly dividend of $0.40 per share of common stock payable on July 16, 2007, to stockholders of record as of June 29, 2007, or an aggregate of approximately $15.7 million. These dividends may not be indicative of any future dividends.

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, our earnings, general business conditions, restrictions imposed by financing arrangements (including our 2007 Credit Facility and Bridge 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.

As a holding company with no direct operations, we depend on loans, dividends and other payments from our subsidiaries to generate the funds necessary to pay dividends to the holders of our common stock, and our subsidiaries may be prohibited or restricted from paying dividends to us or otherwise making funds available to us under certain conditions, including restrictions imposed by our 2007 Credit Facility. Our direct subsidiary, Holdco, may not pay dividends to us unless, after giving effect to any such dividend payment. Holdco and its subsidiaries have a Fixed Charge Coverage Ratio equal to or greater than 1.0 to 1.0 and would be able to incur an additional $1.00 of debt under the incurrence test referred to above as defined in our 2007 Credit Facility. See “Description of Certain Indebtedness.” We expect that for the foreseeable future we will pay dividends in excess of our net income for such period as determined in accordance with GAAP if we are able to generate Adjusted EBITDA in excess of scheduled debt payments, capital expenditure requirements, cash income taxes and cash interest expense in amounts sufficient to permit our subsidiaries to pay dividends to us under our 2007 Credit Facility.

Our Bridge Facility permits us to pay dividends so long as, after giving effect to any such dividend payment, we will be able to incur an additional $1.00 of debt under an incurrence test that requires us to maintain a pro forma Total Leverage ratio of not greater than 8.25 to 1.00.

Based upon our forward-looking results of operations, expected cash flows and anticipated operating efficiencies to be realized through our clustering strategy, we currently expect to be in compliance with all of the debt covenants under our 2007 Credit Facility and Bridge Facility and have the ability to pay regular quarterly dividends. However, our forward-looking results, expected cash flows and realization of incremental operating efficiencies are subject to risks and uncertainties described under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Information.”

Our dividend policy has certain risks and limitations. Although we expect to pay dividends according to our dividend policy, we may not pay dividends according to our policy, or at all, if, among other things, we do not have the cash necessary to pay the intended dividends, or if our financial performance does not achieve expected results. To the extent that we do not have cash on hand sufficient to pay dividends, we may elect not to borrow funds to pay any dividends. By paying cash dividends rather than investing that cash in future growth, we risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, acquisitions or unanticipated capital expenditures, should the need arise.

 

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PRICE RANGE OF COMMON STOCK

Our common stock is listed for trading on the New York Stock Exchange under the symbol “GHS.” The following table sets forth, for each of the periods listed, the high and low closing sales prices of our common stock, as reported by the New York Stock Exchange:

 

     High    Low

Year Ending December 31, 2007

     

First Quarter

   $ 20.54    $ 18.13

Second Quarter (through June 28, 2007)

   $ 22.00    $ 18.21

Year Ending December 31, 2006

     

Fourth Quarter (from October 25, 2006)

   $ 22.10    $ 18.10

The last reported sale price of our common stock on the New York Stock Exchange on June 28, 2007 was $18.57 per share. As of June 28, 2007, there were 174 holders of record of our common stock.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2007: (1) on an actual basis, (2) on a pro forma basis and (3) on a pro forma as adjusted basis to give effect to (a) the receipt by us of the net proceeds from the sale of 17,000,000 shares of common stock at the public offering price of $             per share after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us and (b) the intended application of a portion of the net proceeds of the offering to repay the Bridge Loan. This presentation should be read in conjunction with our consolidated financial statements and the notes to those statements included elsewhere and incorporated by reference in this prospectus, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Use of Proceeds.”

 

     As of March 31, 2007  
     Actual          Pro forma          Pro forma,
as adjusted
 
     (in thousands, except share data)  

Cash and cash equivalents

   $ 6,557           $ 9,319           $ 18,207  
                                    

Debt:

                    

Borrowings under revolving credit facility(1)

   $ —               —               —    

2007 Credit Facility, as amended by the First Amendment

     690,000           $ 1,195,000           $ 1,195,000  

Bridge Facility(2)

     —               300,000             —    

Long-term liabilities, including current portion

     3,737             4,954             4,954  
                                    

Total long-term debt, including current portion

   $ 693,737           $ 1,499,954           $ 1,199,954  
                                    

Stockholders’ equity:

                    

Preferred stock, $0.01 par value: 50,000,000 shares authorized; No shares issued and outstanding on an actual, pro forma and pro forma as adjusted basis

     —               —               —    

Common stock, $0.01 par value, 150,000,000 shares authorized; 39,192,548, 39,192,548 and 56,192,548 shares issued on an actual, pro forma and pro forma as adjusted basis, respectively, and $39,158,880, $39,158,880 and $56,158,880 outstanding on an actual, pro forma and pro forma as adjusted basis, respectively

     381             381             551  

Additional paid-in-capital

     487,080             487,080             795,798  

Accumulated other comprehensive loss

     (4,998 )           (4,998 )           (4,998 )

Retained earnings (accumulated deficit)

     (31,172 )           (31,172 )           (33,077 )

Treasury stock

     (60 )           (60 )           (60 )
                                    

Total stockholders’ equity

     451,231             451,231             758,214  
                                    

Total capitalization

   $ 1,144,968           $ 1,951,185           $ 1,958,168  
                                    

(1) As of March 31, 2007, we had $40.0 million available under the revolving credit facility included in the 2007 Credit Facility (of which $3.1 million was committed under letters of credit).
(2) We intend to use a portion of the net proceeds of the offering to repay the Bridge Loan (including any accrued and unpaid interest) in full. Following this application of net proceeds, the Bridge Facility will be terminated.

 

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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, 2007, our negative net tangible book value at March 31, 2007 was $             million, or $             per share of common stock.

After giving effect to (1) the receipt by us of the net proceeds from the sale of 17,000,000 shares of common stock at the offering price of $             per share and (2) the intended application of a portion of the net proceeds of the offering to repay the Bridge Loan, our pro forma as adjusted negative net tangible book value at March 31, 2007 would be $             million, or $             per share. This represents an immediate and substantial dilution of $             per share to new investors.

The following table illustrates this per share dilution:

 

Public offering price per share

        $            
         

Pro forma negative net tangible book value per share at March 31, 2007

   $                

Increase per share attributable to new investors in the offering

     
         

Pro forma negative net tangible book value per share at March 31, 2007 as adjusted for the offering

     
         

Dilution per share to new investors

      $             
         

The following table summarizes, on a pro forma basis as of March 31, 2007, the difference between 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

   39,158,880    69.7 %   $                          %   $             

New investors in the offering

   17,000,000    30.3          $  
                          

Total

   56,158,880    100.0 %   $               %   $  
                          

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

 

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Table of Contents

SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

Our historical financial data for the fiscal year ended December 31, 2004 and for the period from January 1, 2005 to June 5, 2005 have been derived from the audited consolidated financial statements of the Predecessor incorporated by reference in this prospectus. Our historical financial data as of December 31, 2003 and 2004 and for the year ended December 31, 2003 have been derived from the audited financial statements of the Predecessor not included in this prospectus. Our historical financial data as of December 31, 2005, for the period from June 6, 2005 to December 31, 2005, and as of and for the fiscal year ended December 31, 2006 have been derived from the audited consolidated financial statements of the Successor incorporated by reference in this prospectus. Our historical financial data as of and for the three-month periods ended March 31, 2006 and 2007 have been derived from the unaudited condensed consolidated financial statements of the Successor incorporated by reference 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” included elsewhere in this prospectus and our consolidated financial statements and the notes to those statements incorporated by reference in this prospectus.

Our pro forma condensed consolidated statement of operations data for the year ended December 31, 2006 gives effect to the Massachusetts Acquisitions, the Copley Acquisition, the Gannett Acquisition (excluding revenue and expenses related to the group of assets and liabilities held for sale) and the 2007 Financings as if they had occurred on January 1, 2006. The pro forma condensed consolidated statement of operations data for the three-month period ended March 31, 2007 gives effect to the Copley Acquisition, the Gannett Acquisition (excluding revenue and expenses related to the group of assets and liabilities held for sale) and the 2007 Financings as if they had occurred on January 1, 2006. Our 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 pro forma condensed consolidated financial data are correct. Our 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 Massachusetts Acquisitions, the Copley Acquisition, the Gannett Acquisition and the 2007 Financings had occurred on January 1, 2006. The pro forma condensed consolidated financial data also should not be considered representative of our future financial condition or results of operations.

The pro forma, as adjusted condensed consolidated statements of operations data for the year ended December 31, 2006 gives effect to the Massachusetts Acquisitions, the Copley Acquisition, the Gannett Acquisition, the 2007 Financings, this offering and the application of a portion of the net proceeds of this offering to repay the Bridge Loan, as if they occurred on January 1, 2006. Our summary pro forma, as adjusted condensed consolidated balance sheet data as of March 31, 2007 and our summary pro forma, as adjusted condensed consolidated statement of operations data for the three-month period ended March 31, 2007 gives effect to the Copley Acquisition, the Gannett Acquisition, the 2007 Financings, this offering and the application of a portion of the net proceeds of this offering to repay the Bridge Loan as if they occurred on March 31, 2007 and January 1, 2006, respectively.

 

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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(6)

 

Year

Ended
December 31,
2006(7)

   

Three
Months
Ended
March 31,
2006

   

Three
Months
Ended
March 31,

2007

         Year
Ended
December 31,
2006
   

Three
Months
Ended

March 31,
2007

   

Year

Ended
December 31,
2006

   

Three
Months
Ended

March 31,
2007

 
    2002     2003(4)     2004(5)                      
    (Predecessor)           (Successor)   (Successor)     (Successor)
    (Successor)          (Pro Forma)     (Pro Forma)
    (Pro Forma,
as Adjusted)
    (Pro Forma,
as Adjusted)
 
    (in thousands, except per share data)          (in thousands, except per share data)  

Statement of Operations Data:                    

                           

Revenues:

                           

Advertising

  $ 142,086     $ 139,258     $ 148,291     $ 63,172     $ 88,798   $ 238,721     $ 36,459     $ 71,248         $ 476,475     $ 111,354     $ 476,475     $ 111,354  

Circulation

    32,105       31,478       34,017       14,184       19,298     52,656       8,495       17,257           129,920       32,860       129,920       32,860  

Commercial printing and other

    11,962       11,645       17,776       8,134       11,415     23,553       5,021       6,479           37,459       9,874       37,459       9,874  

Total revenues

    186,153       182,381       200,084       85,490       119,511     314,930       49,975       94,984           643,854       154,088       643,854       154,088  
 

Operating costs and expenses:

                           

Operating costs

    87,103       86,484       97,198       40,007       61,001     160,877       25,971       52,538           352,968       87,528       352,968       87,528  

Selling, general and administrative

    50,497       50,750       52,223       26,210       29,033     91,272       14,880       30,621           157,768       44,486       157,768       44,486  

Depreciation and amortization(1)

    16,473       13,359       13,374       5,776       8,030     24,051       3,599       8,802           54,795       14,977       54,795       14,977  

Transaction costs related to the Massachusetts Acquisitions and Merger

    —         —         —         7,703       2,850     —         —         —             4,420       —         4,420       —    

Integration and reorganization costs and management fees paid to prior owner

    1,480       1,480       1,480       768       1,002     4,486       1,710       838           4,486       838       4,486       838  

Impairment of long-lived assets

    —         —         1,500       —         —       917       —         119           917       119       917       119  

Gain (loss) on sale of assets

    —         (104 )     (30 )     —         40     (700 )     (441 )     (13 )         (745 )     (13 )     (745 )     (13 )

Operating income

    30,600       30,204       34,279       5,026       17,635     32,627       3,374       2,053           67,755       6,127       67,755       6,127  

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

    35,730       49,545       63,762       32,884       1,020     37,474       2,601       10,618           110,646       26,458       90,186       21,343  

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

    (5,130 )     (19,341 )     (29,483 )     (27,858 )     16,615     (4,847 )     773       (8,565 )         (42,891 )     (20,331 )     (22,431 )     (15,216 )

Income tax expense (benefit)

    1,648       (4,691 )     1,228       (3,027 )     7,050     (3,273 )     368       (2,486 )         (13,953 )     (7,081 )     (5,943 )     (5,078 )

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

    (6,778 )     (14,650 )     (30,711 )     (24,831 )     9,565     (1,574 )     405       (6,079 )         (28,938 )     (13,250 )     (16,488 )     (10,138 )

Income from discontinued operations, net of income taxes

    5,557       486       4,626       —         —       —         —         —             —         —         —         —    

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

  $ (1,221 )   $ (14,164 )   $ (26,085 )   $ (24,831 )   $ 9,565   $ (1,574 )   $ 405     $ (6,079 )       $ (28,938 )     (13,250 )   $ (16,488 )   $ (10,138 )

Cumulative effect of change in accounting principle, net of tax

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

Net Income (loss)

  $ (2,670 )   $ (14,164 )   $ (26,085 )   $ (24,831 )   $ 9,565   $ (1,574 )   $ 405     $ (6,079 )       $ (28,938 )     (13,250 )   $ (16,488 )   $ (10,138 )

Net income (loss) available to common stockholders

  $ (25,292 )   $ (26,573 )   $ (26,085 )   $ (24,831 )   $ 9,565   $ (1,574 )   $ 405     $ (6,079 )       $ (28,938 )   $ (13,250 )   $ (16,488 )   $ (10,138 )
                                                                                                 

 

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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(6)

 

Year Ended
December 31,
2006(7)

   

Three
Months
Ended
March 31,
2006

 

Three
Months
Ended
March 31,
2007

   

Year Ended

December 31,

2006

   

Three

Months

Ended

March 31,

2007

   

Year Ended

December 31,

2006

   

Three

Months
Ended
March 31,

2007

 
     2002     2003(4)     2004(5)                    
     (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)     (Successor)  

(Successor)

    (Successor)   (Successor)     (Pro Forma)     (Pro Forma)     (Pro Forma,
as Adjusted)
    (Pro Forma,
as Adjusted)
 
     (in thousands, except per share data)     (in thousands, except per share data)  

Basic net income (loss) from continuing operations per share(2)

  $ (0.14 )   $ (0.13 )   $ (0.14 )   $ (0.12 )   $ 0.43   $ (0.06 )   $ 0.02   $ (0.16 )   $ (1.15 )   $ (0.35 )   $ (0.40 )   $ (0.19 )

Diluted income (loss) from continuing operations per share(2)

  $ (0.14 )   $ (0.13 )   $ (0.14 )   $ (0.12 )   $ 0.43   $ (0.06 )   $ 0.02   $ (0.16 )   $ (1.15 )   $ (0.35 )   $ (0.40 )   $ (0.19 )

Basic net income (loss) available to common stockholders per share(2)

  $ (0.12 )   $ (0.12 )   $ (0.12 )   $ (0.12 )   $ 0.43   $ (0.06 )   $ 0.02   $ (0.16 )   $ (1.15 )   $ (0.35 )   $ (0.40 )   $ (0.19 )

Diluted net income (loss) available to common stockholders per share(2)

  $ (0.12 )   $ (0.12 )   $ (0.12 )   $ (0.12 )   $ 0.43   $ (0.06 )   $ 0.02   $ (0.16 )   $ (1.15 )   $ (0.35 )   $ (0.40 )   $ (0.19 )
 

Other Data (unaudited):

                       

Adjusted EBITDA(3)

    $ 43,563     $ 49,153     $ 18,505     $ 28,515   $ 57,595     $ 6,973   $ 11,179     $ 127,870     $ 21,448     $ 127,870     $ 21,448  

Cash interest paid

    $ 22,754     $ 24,210     $ 16,879     $ 31,720   $ 38,459     $ 6,598   $ 9,284          

(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 lives 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) All share and per share data has been computed as if the 100-for-1 stock split 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 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. Adjusted EBITDA provides an indicator for management to determine if adjustments to current spending decisions are needed.

 

   Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation and interest expense associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the short-term, namely 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.”

 

(4) Includes the results of Midland Communications printing facility since its acquisition in December 2003.

 

(5) Includes the results of the newspapers acquired from Lee Enterprises on February 3, 2004.
(6) Includes an unrealized gain on the derivative instrument of $10,807 as well as a decrease in interest expense due to debt extinguishment in connection with the Merger.
(7) Includes the results of CP Media and Enterprise NewsMedia, LLC since their acquisitions on June 6, 2006.

 

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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

   

Year Ended
December 31,
2006

   

Three
Months
Ended
March 31,
2006

   

Three
Months
Ended

March 31,
2007

    Year Ended
December 31,
2006
    Three
Months
Ended
March 31,
2007
    Year Ended
December 31,
2006
   

Three
Months
Ended

March 31,
2007

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

(Successor)

    (Successor)     (Successor)     (Pro forma)     (Pro forma)      (Pro forma,
as Adjusted)
    (Pro forma,
as Adjusted)
 
    

(in thousands)

    (in thousands)  

Income (loss) from continuing operations

  $ (14,650 )   $ (30,711 )   $ (24,831 )   $ 9,565     $ (1,574 )   $ 405     $ (6,079 )   $ (28,938 )   $ (13,250 )   $ (16,488 )   $ (10,138 )

Income tax expense (benefit)

    (4,691 )     1,228       (3,027 )     7,050       (3,273 )     368       (2,486 )     (13,953 )     (7,081 )     (5,943 )     (5,078 )

Write-off of deferred offering costs

    1,935       —         —         —         —         —         —         —         —         —         —    

Write-off of deferred financing costs

    161       —         —         —         —         —         —         —         —         —         —    

Unrealized (gain) loss on derivative instrument

    —         —         —         (10,807 )     (1,150 )     (2,605 )     383       (1,150 )     383       (1,150 )     383  

Loss on early extinguishment of debt

    —         —         5,525       —         2,086       —         —         3,449       —         3,449       —    

Amortization of deferred financing costs

    1,810       1,826       643       67       544       30       223       4,397       317       4,397       317  

Interest expense—dividends on mandatorily redeemable preferred stock

    13,206       29,019       13,484       —         —         —         —         —         —         —         —    

Interest expense—debt

    32,433       32,917       13,232       11,760       35,994       5,176       10,217       103,933       25,983       83,473       20,868  

Impairment of long-lived assets

    —         1,500       —         —         917       —         119       917       119       917       119  

Transaction costs related to Merger and the Massachusetts Acquisitions

    —         —         7,703       2,850       —         —         —         4,420       —         4,420       —    

Depreciation and amortization

    13,359       13,374       5,776       8,030       24,051       3,599       8,802       54,795       14,977       54,795       14,977  
                                                                                         

Adjusted EBITDA

  $ 43,563 (a)   $ 49,153 (b)   $ 18,505 (c)   $ 28,515 (d)   $ 57,595 (e)   $ 6,973 (f)   $ 11,179 (g)   $ 127,870 (h)(i)   $ 21,448 (j)(i)   $ 127,870     $ 21,448  
                                                                                         

(a) Adjusted EBITDA for the year ended December 31, 2003 includes a total of $1,610 net expense, which is comprised of non-cash compensation and other expense of $26, management fees paid to prior owners of $1,480 and a loss of $104 on the sale of assets.

 

(b) Adjusted EBITDA for the year ended December 31, 2004 includes a total of $1,076 net expense, which is comprised of management fees paid to prior owners of $1,480 and a loss of $30 on the sale of assets, partially offset by $434 of other income.

 

(c) Adjusted EBITDA for the period from January 1, 2005 to June 5, 2005 includes a total of $1,564 net expense, which is comprised of non-cash compensation and other expense of $796 and management fees paid to prior owners of $768.

 

(d) Adjusted EBITDA for the period from June 6, 2005 to December 31, 2005 includes a total of $1,643 net expense, which is comprised of non-cash compensation and other expense of $681 and integration and reorganization costs of $1,002, which are partially offset by a $40 gain on the sale of assets.

 

(e) Adjusted EBITDA for the year ended December 31, 2006 includes a total of $11,109 net expense, which is comprised of non-cash compensation and other expense of $5,175, non-cash portion of postretirement benefit expense of $748, integration and reorganization costs of $4,486 and a $700 loss on the sale of assets.

 

(f) Adjusted EBITDA for the three months ended March 31, 2006 includes a total of $2,855 net expense, which is comprised of non-cash compensation and other expense of $704, integration and reorganization costs of $1,710 and a $441 loss on the sale of assets.

 

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(g) Adjusted EBITDA for the three months ended March 31, 2007 includes a total of $4,333 net expense, which is comprised of non-cash compensation and other expense of $2,153, non-cash portion of postretirement benefits expense of $314, integration and reorganization costs of $838, a $13 loss on the sale of assets and the impact of SureWest purchase accounting of $1,015.

 

(h) Pro forma Adjusted EBITDA for the year ended December 31, 2006 includes a total of $27,803 net expense, which is comprised of non-cash compensation and other expense of $6,927, non-cash portion of postretirement benefits expense of $1,615, lease abandonment costs and amortization of prepaid rent at CP Media of $270, integration and reorganization costs of $6,729, a $700 loss on the sale of assets, pension, health and supplemental employee retirement plan expenses of $1,727 (these plans were not assumed in the acquisition by GateHouse), corporate and third party charges not assumed by GateHouse of $6,419 and severance expense of $3,416.

 

(i) Excludes revenue and expenses related to the group of assets and liabilities from the Gannett Acquisition held for sale.

 

(j) Pro forma Adjusted EBITDA for the three months ended March 31, 2007 includes a total of $7,527 net expense, which is comprised of non-cash compensation and other expense of $2,346, non-cash portion of postretirement benefits expense of $314, integration and reorganization costs of $838, a $13 loss on the sale of assets, the impact of SureWest purchase accounting of $1,015, pension, health and supplemental employee retirement plan expenses of $340 (these plans were not assumed in the acquisition by GateHouse), corporate and third party charges not assumed by GateHouse of $1,796 and severance expense of $865.

 

    As of December 31,  

As of

March 31,

2007

      

As of

March 31,
2007

 

As of

March 31,
2007

       
    2002     2003     2004     2005   2006            
    (Predecessor)     (Predecessor)     (Predecessor)     (Successor)   (Successor)   (Successor)        (Pro Forma)  

(Pro Forma,

as Adjusted)

       
    (in thousands)        (in thousands)        

Balance Sheet Data:

                       

Total assets

  $ 506,325     $ 492,349     $ 488,176     $ 638,726   $ 1,167,723   $ 1,288,300       $ 2,153,796   $ 2,159,554    

Total long-term obligations, including current maturities

    564,843       582,241       602,003       313,655     559,811     693,737         1,499,954     1,199,954    

Stockholders’ equity (deficit)

    (112,936 )     (139,492 )     (165,577 )     232,056     473,084     451,231         451,231     758,214    

 

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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 Information.”

Overview

We are one of the largest publishers of locally-focused print and online media in the United States as measured by number of daily publications. Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve. As of May 7, 2007 our portfolio of products, which includes 470 community publications and more than 245 related websites, and seven yellow page directories, served over 173,000 business advertising accounts and reached approximately 10 million people on a weekly basis.

Our core products include:

 

  Ÿ  

87 daily newspapers with total paid circulation of approximately 818,000;

 

  Ÿ  

248 weekly newspapers (published up to three times per week) with total paid circulation of approximately 538,000 and total free circulation of approximately 691,000;

 

  Ÿ  

135 “shoppers” (generally advertising-only publications) with total circulation of approximately 2.5 million;

 

  Ÿ  

over 245 locally focused websites, which extend our franchises onto the internet; and

 

  Ÿ  

seven yellow page directories with a distribution of approximately 758,000 that covers a population of approximately two million people.

In addition to our core products, we also opportunistically produce niche publications that address specific local market interests such as recreation, sports, healthcare and real estate. Over the last 12 months, we created 79 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. 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. As of March 31, 2007, Fortress beneficially owned approximately 57.8% of our outstanding common stock and after giving effect to this offering will beneficially own approximately 40.3% of our outstanding common stock, or 38.6% if the underwriters’ option to purchase additional shares is fully exercised.

Since 1998, we have acquired 343 daily and weekly newspapers, shoppers and directories including 17 dailies, 120 weeklies and 22 shoppers acquired in the Massachusetts Acquisitions, the Copley Acquisition and the Gannett Acquisition, and launched numerous new products, including 10 weekly newspapers.

 

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We generate revenues from advertising, circulation and commercial printing. Advertising revenue is recognized upon publication of the advertisements. Circulation revenue from subscribers, which is billed to customers at the beginning of the subscription period, is recognized on a straight-line basis over the term of the related subscription. The revenue for commercial printing is recognized upon delivery of the printed product to our customers. Directory revenue is recognized on a straight-line basis over the 12-month period in which the corresponding directory is distributed.

Our advertising revenue tends to follow a seasonal pattern, with higher advertising revenue in months containing significant events or holidays. Accordingly, our first fiscal 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.

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

According to the Newspaper Association of America, overall daily newspaper circulation, including national and urban newspapers, has declined at an average annual rate of 0.8% during the three-year period from 2002 to 2004. This has put downward pressure on advertising and circulation revenues in the industry. We have maintained relatively stable revenues due to our geographic diversity, well-balanced portfolio of products, strong local franchises and broad customer base. We believe our local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer advertising channels through which to reach their target audience.

Operating cost categories of newsprint, labor and delivery costs have experienced increased upward price pressure in the industry over the three-year period from 2003 to 2006 but newsprint costs have declined in the first quarter of 2007. We expect newsprint costs to be flat or decline for the remainder of 2007. We have experienced these upward price pressures and have taken steps to mitigate some of these increases. We are a member of a newsprint-buying consortium which enables our local publishers to obtain favorable pricing. Additionally, we have taken steps to cluster our operations, thereby increasing the usage of facilities and equipment while increasing the productivity of our labor force. We expect to continue to employ these steps as part of our business and clustering strategy.

Recent Developments

During January 2007, we acquired an additional 24 publications for an aggregate purchase price of approximately $23.8 million. The acquisitions include one daily, 13 weeklies and 10 shopper publications with an aggregate circulation of approximately 292,000.

In February 2007, we completed our acquisition of eight publications from the Journal Register Company for a net purchase price of approximately $70.0 million plus approximately $2.0 million of working capital. The acquisition included two daily and four weekly newspapers, and two shoppers, serving southeastern Massachusetts with an aggregate circulation of approximately 122,000.

In February 2007, we completed our purchase of all the issued and outstanding capital stock of SureWest from SureWest Communications for a net purchase price of $106.5 million, plus $3.5 million of working capital. SureWest is engaged in the business of publishing yellow page and white page directories in and around the Sacramento, California area and provides internet yellow pages through the sacramento.com website. As a result of this acquisition, we became the publisher of the official directory of SureWest Telephone.

 

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In February 2007, we amended and restated our 2006 Credit Facility by entering into the 2007 Credit Facility. The 2007 Credit Facility provides for a (i) $670.0 million term loan facility which matures in August 2014, (ii) delayed draw term loan facility of up to $250.0 million which matures in August 2014 and (iii) revolving credit facility with a $40.0 million aggregate loan commitment available, including a $15.0 million sub-facility for letters of credit and a $10.0 million swingline facility, which matures in February 2014.

In addition to the interest rate swaps effectively fixing the interest rate on $570.0 million of the debt associated with our 2006 First Lien Facility, we entered into and designated an interest rate swap, based on a notional amount of $100.0 million maturing September 2014, as a cash flow hedge in connection with the 2007 Credit Facility. Under the swap agreement, we receive interest equivalent to one-month LIBOR and pay a fixed rate of 5.14% with settlements occurring monthly.

In March 2007, our board of directors declared a first quarter 2007 dividend of $0.37 per share of common stock, for the period from January 1, 2007 to March 31, 2007, which was paid on April 16, 2007 to stockholders of record as of March 30, 2007.

In April 2007, we completed our acquisition of 15 publications from Copley for a net purchase price of $380.0 million plus working capital adjustments of approximately $1.6 million. The acquisition includes seven daily and two weekly newspapers, and six shoppers, serving areas of Ohio and Illinois with an aggregate circulation of approximately 465,000.

In April 2007, we entered into the Bridge Facility with a syndicate of financial institutions with Wachovia Investment Holdings, LLC as administrative agent. The Bridge Facility provides for a $300.0 million term loan facility which matures on April 11, 2015.

In connection with the 2007 Credit Facility, we entered into and designated an interest rate swap, based on a notional amount of $250.0 million maturing September 2014, as a cash flow hedge. Under the swap agreement, we receive interest equivalent to one month LIBOR and pay a fixed rate of 4.971% with settlements occurring monthly.

In connection with the First Amendment, we entered into and designated an interest rate swap, based on a notional amount of $200.0 million maturing September 2014, as a cash flow hedge. Under the swap agreement, we receive interest equivalent to one month LIBOR and pay a fixed rate of 5.079% with settlements occurring monthly.

In May 2007, we completed our acquisition of 13 publications from Gannett for a net purchase price of approximately $410.0 million plus working capital adjustments of approximately $9.8 million. The acquisition includes four daily and three weekly newspapers, and six shoppers, serving Rockford, Illinois, Utica, New York, Norwich, Connecticut and Huntington, West Virginia with an aggregate circulation of approximately 457,000.

In May 2007, we entered into the First Amendment to amend our 2007 Credit Facility and increased our borrowings by $275.0 million.

As of May 7, 2007, we had a total of $1.195 billion of term loans outstanding under the 2007 Credit Facility (including the delayed draw term loan facility which has been fully drawn), as amended by the First Amendment, and $300.0 million of term loans outstanding under our Bridge Facility.

In May 2007, we announced a partnership with Yahoo! HotJobs as part of a larger local media consortium to provide recruitment advertising services to each of our daily, and more than 160 of our weekly, newspapers nationwide. Our addition to the consortium significantly expands the number of local newspapers that have teamed with Yahoo! HotJobs to advance this leading recruitment brand, and it further highlights our commitment to our online strategy. We have also partnered with Google on their AdSense and PrintAds programs.

 

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In June 2007, our board of directors declared a second quarter 2007 dividend of $0.40 per share of common stock, for the period from April 1, 2007 to June 30, 2007, which is payable on July 16, 2007 to stockholders of record on June 29, 2007.

In June 2007, we signed a definitive agreement to sell The Herald Dispatch and related publications (initially acquired in the Gannett Acquisition) which are located in Huntington, West Virginia, to Champion Industries, Inc. for a purchase price of $77 million. The sale is expected to be consummated before the end of August 2007 and is subject to regulatory approval and customary closing conditions. We intend to use the proceeds from this sale to pay down debt on our 2007 Credit Facility.

Predecessor and Successor

In accordance with GAAP, we have separated our historical financial results for the period prior to the consummation of the Merger, or the Predecessor Period, and the period subsequent to the consummation of the Merger, or the Successor Period. 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 and the financing transactions and transactions with our stockholders.

Pro Forma

We believe that the separate presentation of historical financial results for the Predecessor and Successor periods 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, we have presented our operating results on a pro forma basis for the years ended December 31, 2005 and 2006 and the three-month periods ended March 31, 2006 and 2007. This pro forma presentation for the year ended December 31, 2005 assumes that the Merger, the Massachusetts Acquisitions, and the 2006 Financing occurred at the beginning of 2005. This pro forma presentation for the year ended December 31, 2006 and the three-month period ended March 31, 2006 assumes that the Massachusetts Acquisitions, the Copley Acquisition, the Gannett Acquisition and the 2007 Financings occurred at the beginning of 2006. This pro forma presentation for the three month period ended March 31, 2007 assumes that the Copley Acquisition, the Gannett Acquisition and the 2007 Financings occurred at the beginning of 2006. These pro forma presentations are not necessarily indicative of what our operating results would have actually been had the Massachusetts Acquisitions, the Copley Acquisition, the Gannett Acquisition and the 2007 Financings occurred at the beginning of each pro forma period.

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.

 

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Goodwill and Long-Lived Assets

We assess the potential impairment of goodwill and intangible assets with indefinite lives on an annual basis in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). We perform our impairment analysis on each of our reporting units, represented by our five geographic regions. The geographic regions have discrete financial information and are regularly reviewed by management. The fair value of the applicable reporting unit is compared to its carrying value. Calculating the fair value of a reporting unit requires us to make significant estimates and assumptions. We estimate fair value by applying third-party market value indicators to projected cash flows and/or projected earnings before interest, taxes, depreciation, and amortization. In applying this methodology, we rely on a number of factors, including current operating results and cash flows, expected future operating results and cash flows, future business plans, and market data. If the carrying value of the reporting unit exceeds the estimate of fair value, we calculate the impairment as the excess of the carrying value of goodwill over its implied fair value.

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

Valuation of Privately-Held Company Equity Securities Issued as Compensation

We record share-based compensation, which consists of the amounts by which the estimated fair value of the instrument underlying the grant exceeds the grant or exercise price, at the date of grant or other measurement date, if applicable, and recognize the expense over the related service period. In determining the fair value of our common stock at the dates of grant prior to our IPO on October 25, 2006, our stock was not traded and, therefore, we were unable to rely on a public trading market for our stock prior to October 25, 2006.

In June 2005, we issued an aggregate of 442,500 restricted shares of our common stock (each such grant, an “RSG”) to our executive officers. We determined that each share of our common stock had a fair value of $10 per share based on the proximity in time to the Merger. The Merger was on arms’ length terms and we believe established the fair value of our equity on June 6, 2005 at $10 per share.

During the six months ended June 30, 2006, we issued 25,000 shares of our common stock to a management investor at a price of $10 per share, representing a discount of $5.01 from the then estimated fair value of $15.01 per share. We also issued 300,000, 20,000 and 30,000 shares of our common stock in connection with RSGs in January 2006, March 2006 and May 2006, respectively, in

 

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each case having an estimated fair value of $15.01 per share. During the six months ended June 30, 2006, 3,000 shares of our common stock issued in a June 2005 RSG, having a fair value of $15.01 per share, vested in accordance with a severance agreement.

We estimated that the fair value of our common stock was $15.01 per share based on a valuation using a discounted cash flow approach as of July 2006.

In preparing a discounted cash flow analysis, we made certain significant assumptions including:

 

  Ÿ  

the rate of our revenue growth, which is a function of, among other things, anticipated increases in advertising rates (consumer price index (CPI) based), impacts of our online strategy and the introduction of niche products;

 

  Ÿ  

the rate of our Adjusted EBITDA growth, which is a function of, among other things, anticipated revenues, cost reductions and synergies from the integration of CNC and Enterprise and ongoing cost savings resulting from our clustering strategy;

 

  Ÿ  

estimated capital expenditures;

 

  Ÿ  

the discount rate of 7.8%, based on our capital structure as of July 2006, the cost of equity, based on a risk free rate of 5.0% and a market risk premium of 7.0%, and our cost of debt; and

 

  Ÿ  

a terminal multiple of between 9 and 10 times unlevered cash flow, based upon our anticipated growth prospects and private and public market valuations of comparable companies. We define unlevered cash flow as Adjusted EBITDA less interest expense, cash taxes and capital expenditures.

We also considered the levered cash flow and adjusted EBITDA based trading multiples of comparable companies, including Dow Jones & Company, Inc., Gannett Co., Inc., Journal Register Company, Lee Enterprises, Incorporated, The McClatchy Company, The New York Times Company, The E.W. Scripps Company, Media General, Inc., Journal Communications, Inc. and Tribune Company, and sales transactions for comparable companies in our industry that had been completed over the prior two years, including Community Newspaper Holding Inc.’s acquisition of Eagle Tribune Publishing Company, Lee Enterprises’s acquisition of Pulitzer Inc., and Journal Register Company’s acquisition of 21st Century Newspapers, Inc. While we believe that none of these companies are directly comparable to us given the local nature of our business, we believe they are sufficiently comparable for purposes of comparing their levered cash flow and Adjusted EBITDA based trading multiples against the multiple of our levered cash flow and Adjusted EBITDA forecasted for 2006. Finally, the multiple of Adjusted EBITDA is in line with the multiple we paid in the Massachusetts Acquisitions. Additionally, we considered the results of operations, market conditions, competitive position and the stock performance of these companies, as well as our financial forecasts, as updated, to develop our valuation. We determined the trading multiples of comparable companies and other factors supported the valuation based on the discounted cash flow analysis prepared by management, which was also determined by management to be the best available tool for purposes of valuing our share-based compensation.

We believe we met our internal financial performance objectives as reflected in our valuation. The valuation was undertaken prior to the selection of underwriters for our IPO. The IPO price of $18.00 per share was at a premium to the $15.01 valuation we ascribed to shares of our common stock for purposes of determining compensation expense. Reasons for the premium included: (1) expectations of increased operating efficiency and cost savings in 2007 relative to when we originally valued the stock, (2) our valuation at a premium multiple to our public comparables given the nature of the local and small market focus of our business versus our more urban oriented peers and (3) cash flow growth prospects relative to the peer group.

 

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We did not obtain contemporaneous valuations by unrelated valuation specialists at the time common stock was issued to employees in 2006 because: (1) our efforts were focused on, among other things, potential acquisitions, including the Massachusetts Acquisitions, and the 2006 Financing and (2) we did not consider it to be economic to incur costs for such valuations given the number of shares issued.

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 (“SFAS No. 133”), 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 accumulated other comprehensive income. However, any ineffective portion of a derivative’s change in fair value is recognized immediately in earnings. Fair values of derivatives are subject to significant variability based on market conditions, such as future levels of interest rates. This variability could result in a significant increase or decrease in our accumulated other comprehensive income and/or earnings but will generally have no effect on cash flows, provided the derivative is carried through to full term.

Income Taxes

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

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) 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 a 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

 

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specific guidance would be an adjustment to retained earnings as of the beginning of the adoption period. The FASB has issued a FASB Staff Position (“FSP”) related to FIN 48. The proposed FSP, Definition of Settlement in FASB Interpretation No. 48, would amend FIN 48 to address concerns regarding the meaning of “ultimately settled” in paragraph 10b. The implementation of FIN 48 did not have a material impact on our consolidated financial statements.

We record tax assets and liabilities at the date of a purchase business combination, based on our best estimate of the ultimate tax basis that will be accepted by the tax authority, and liabilities for prior tax returns of the acquired entity should be based on our best estimate of the ultimate settlement in accordance with Emerging Issues Task Force (“EITF”) Issue No. 93-7, Uncertainties Related to Income Taxes in a Purchase Business Combination. At the date of a change in our best estimate of the ultimate tax basis of acquired assets, liabilities, and carryforwards, and at the date that the tax basis is settled with the tax authority, tax assets and liabilities will be adjusted to reflect the revised tax basis and the amount of any settlement with the tax authority for prior-year income taxes. Similarly, at the date of a change in our best estimate of items relating to the acquired entity’s prior tax returns, and at the date that the items are settled with the tax authority, any liability previously recognized will be adjusted. The effect of those adjustments is applied to increase or decrease the remaining balance of goodwill attributable to that acquisition. If goodwill is reduced to zero, the remaining amount of those adjustments will applied initially to reduce to zero other noncurrent intangible assets related to that acquisition, and any remaining amount should be recognized in earnings.

We also adjust income tax accounts related to purchase business combinations during the purchase accounting allocation period, based on information on which we are waiting that becomes available within one year of the acquisition date. These adjustments can significantly affect our scheduling of deferred tax assets and liabilities and our determination of the need for a valuation allowance on deferred tax assets, and therefore on reported results.

Self-Insurance Liability Accruals

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

 

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Results of Operations

The following table summarizes our historical results of operations for the year ended December 31, 2004 and our pro forma results of operations for the years ended December 31, 2005 and 2006 and the three-month periods ended March 31, 2006 and 2007.

   

Year ended

December 31,

2004

   

Year ended

December 31,

2005

   

Year ended

December 31,

2006

    Three
months
ended
March 31,
2006
    Three
months
ended
March 31,
2007
 
    (Predecessor)     (Pro forma)     (Pro forma)     (Pro forma)     (Pro forma)  
          (in thousands)                    

Revenues:

              

Advertising

  $ 148,291     $ 294,579     $ 476,475       110,863       111,354  

Circulation

    34,017       66,593       129,920       32,082       32,860  

Commercial printing and other

    17,776       23,815       37,459       8,650       9,874  
                                       

Total revenues

    200,084       384,987       643,854       151,595       154,088  

Operating costs and expenses:

              

Operating costs

    97,198       204,346       352,968       86,572       87,528  

Selling, general and administrative

    52,223       99,020       157,768       39,143       44,486  

Depreciation and amortization

    13,374       28,084       54,795       13,405       14,977  

Transaction costs related to Merger and Massachusetts Acquisitions

    —         10,553       4,420       —         —    

Integration and reorganization costs and management fees paid to prior owner.

    1,480       1,770       4,486       1,710       838  

Impairment of long-lived assets

    1,500       —         917       —         119  

Gain (loss) on sale of assets

    (30 )     —         (745 )     (437 )     (13 )
                                       

Operating income

    34,279       41,214       67,755       10,328       6,127  

Interest expense—debt

    32,917       49,396       103,933       25,983       25,983  

Interest expense—dividends on mandatorily redeemable preferred stock

    29,019       —         —         —         —    

Amortization of deferred financing costs

    1,826       883       4,397       1,099       317  

Loss on early extinguishment of debt

    —         5,525       3,449       —         —    

Unrealized (gain) loss on derivative instrument

    —         (10,807 )     (1,150 )     (2,605 )     383  

Write-off of deferred financing costs

    —         2,025       —         —         —    

Other (income) expense

    —         (22 )     17       (23 )     (225 )
                                       

Loss from continuing operations before income taxes

    (29,483 )     (5,786 )     (42,891 )     (14,126 )     (20,331 )

Income tax expense (benefit)

    1,228       8,313       (13,953 )     (4,190 )     (7,081 )
                                       

Loss from continuing operations

    (30,711 )     (14,099 )     (28,938 )     (9,936 )     (13,250 )

Income from discontinued operations, net of income taxes

    4,626       —         —         —         —    
                                       

Net loss

  $ (26,085 )   $ (14,099 )   $ (28,938 )   $ (9,936 )   $ (13,250 )
                                       

Three Months Ended March 31, 2007 Compared To Three Months Ended March 31, 2006

Revenue. Total revenue for the three months ended March 31, 2007 increased by $2.5 million, or 1.6%, to $154.1 million from $151.6 million for the three months ended March 31, 2006. The increase in total revenue was comprised of a $0.5 million, or 0.4%, increase in advertising revenue, a $0.8 million, or 2.4%, increase in circulation revenue and a $1.2 million, or 14.2%, increase in commercial printing and other revenue. An increase in advertising revenue was primarily due to advertising revenue from the newspaper businesses acquired during the second quarter of 2006 and the first quarter of 2007 of $5.3 million, partially offset by a decrease in advertising revenue from our same property publications of $4.8 million. The increase in circulation revenue was primarily due to

 

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circulation revenue from the newspaper businesses acquired during the second quarter of 2006 and the first quarter of 2007 of $1.3 million, partially offset by a decrease in circulation revenue from our same property publications of $0.5 million. The increase in commercial printing and other revenue was primarily due to revenue from the newspaper businesses acquired during the second quarter of 2006 and the first quarter of 2007 of $2.1 million, as well as an increase in commercial printing and other revenue from our same property publications of $0.8 million. These amounts were partially offset by a decrease in commercial printing and other revenue of $1.7 million related to the disposition of one of our production facilities in October 2006.

We acquired SureWest on February 28, 2007. SureWest publishes and sells directory advertising in yellow page and white page directories which are published annually and had total circulation exceeding 600,000 for the year ended December 31, 2006. Deferred revenue and the related costs since the date of the SureWest acquisition are not recorded in this period since no new directories were issued. This resulted in revenues and expenses being less that what the predecessor owner would have recognized. Exclusive of the effect of purchase accounting adjustments, revenue during the period from February 28, 2007 to March 31, 2007 and the three months ended March 31, 2007 would have been $1.6 million and $4.7 million, respectively.

Operating Costs. Operating costs for the three months ended March 31, 2007 increased by $1.0 million, or 1.1%, to $87.5 million from $86.6 million for the three months ended March 31, 2006. The increase in operating costs was primarily due to operating costs of the newspaper businesses acquired during the second quarter of 2006 and the first quarter of 2007 of $5.4 million. This amount was partially offset by decreased payroll, newsprint, ink, external printing and postage expenses of $1.0 million, $1.2 million, $0.1 million, $0.1 million and $0.4 million, respectively, as well as a decrease in operating expenses of $1.4 million related to the disposition of one of our production facilities in October 2006.

Selling, General and Administrative. Selling, general and administrative expenses for the three months ended March 31, 2007 increased by $5.3 million, or 13.6%, to $44.5 million from $39.1 million for the three months March 31, 2006. The increase in selling, general and administrative expenses was primarily due to selling, general and administrative expenses of the newspaper businesses acquired during the second quarter of 2006 and the first quarter of 2007 of $2.2 million, as well as an increase in non-cash compensation expense related to our RSGs of $0.8 million. Additionally, during the three months ended March 31, 2007 we incurred an increase in professional fees and pension and postretirement expenses of $0.6 million and $0.2 million, respectively, and an increase of $1.0 million of compensation expense relating to the Copley Acquisition and the Gannet Acquisition. These amounts were partially offset by a decrease in selling, general and administrative expenses of $0.2 million related to the disposition of one of our production facilities in October 2006.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended March 31, 2007, increased by $1.6 million to $15.0 million from $13.4 million for the three months ended March 31, 2006. The increase was primarily due to depreciation and amortization of newspaper businesses acquired during the second quarter of 2006 and the first quarter of 2007 of $1.2 million. Additionally, during the first quarter of 2007, we incurred capital expenditures of $2.0 million.

Impairment of Long-Lived Assets. During the three months ended March 31, 2007 we incurred a charge of $0.1 million related to the impairment of property, plant and equipment which were classified as held for sale at March 31, 2007.

Unrealized (Gain) Loss on Derivative Instrument. During the three months ended March 31, 2007 we recorded a loss of $0.4 million due to ineffectiveness related to our $300 million interest rate swap, which we entered into in June 2005 in an effort to eliminate a significant portion of our exposure to fluctuations in LIBOR. This hedge resulted in a gain of $2.6 million due to ineffectiveness in 2006.

 

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Income Tax Benefit. Income tax benefit for the three months ended March 31, 2007 was $7.1 million compared to $4.2 million for the three months ended March 31, 2006. The change of $2.9 million was primarily due to an increase in book pretax loss during the three months ended March 31, 2007. The effective tax rate was 34.8% for the three months ended March 31, 2007 and 29.7% for the three months ended March 31, 2006. The 2007 effective rate was impacted by adjustments for tax contingencies identified in the quarter and the 2006 effective tax rate was impacted by pre-tax losses related to the Massachusetts acquisitions for which a benefit could not be recorded.

Net Loss. Net loss for the three months ended March 31, 2007 was $13.3 million. Net loss for the three months ended March 31, 2006 was $9.9 million. Our net loss increased due to the factors noted above.

Year Ended December 31, 2006 Compared To Year Ended December 31, 2005

The discussion of our results of operations that follows is based upon our pro forma results of operations for the years ended December 31, 2005 and December 31, 2006.

Revenue. Total revenue for the year ended December 31, 2006 increased by $258.9 million, or 67.2%, to $643.9 million from $385.0 million for the year ended December 31, 2005. The increase in total revenue was comprised of a $181.9 million, or 61.7%, increase in advertising revenue, a $63.3 million, or 95.1%, increase in circulation revenue and a $13.6 million, or 57.3%, increase in commercial printing and other revenue. The increase in advertising revenue was primarily due to advertising revenue from the Copley Acquisition and the Gannett Acquisition of $104.0 million and $74.0 million, respectively. The increase was also due to advertising revenue from the newspaper businesses acquired during the fourth quarter of 2005 and the first and second quarters of 2006 of $7.7 million. These amounts were partially offset by a decrease in advertising revenue from our same property publications of $3.3 million, as well as a decrease in advertising revenue due to one less week in the current period at certain publications acquired from CP Media, which utilized a non-calendar fiscal year, of $1.6 million. The increase in circulation revenue was primarily due to circulation revenue from the Copley Acquisition and the Gannett Acquisition of $44.2 million and $19.6 million, respectively. The increase was also due to circulation revenue from the newspaper businesses acquired during the fourth quarter of 2005 and the first and second quarters of 2006 of $1.2 million. These amounts were partially offset by a decrease in circulation revenue from our same property publications of $1.5 million, as well as a decrease of $0.2 million from the shortened period in 2006. The increase in commercial printing and other revenue was primarily due to revenue from the Copley Acquisition and the Gannett Acquisition of $10.6 million and $1.5 million, respectively. The increase was also due to revenue from the newspaper businesses acquired during the fourth quarter of 2005 and the first and second quarters of 2006 of $4.2 million. These amounts were partially offset by decreases in revenue from our same property publications of $1.4 million, as well as a decrease of $0.1 million due to the shortened period in 2006.

Operating Costs. Operating costs for the year ended December 31, 2006 increased by $148.6 million, or 72.7%, to $353.0 million from $204.3 million for the year ended December 31, 2005. The increase in operating costs is primarily due to operating costs associated with the Copley Acquisition and the Gannett Acquisition of $93.1 million and $49.6 million, respectively. The increase was also due to operating expenses of the newspaper businesses acquired during the fourth quarter of 2005 and the first and second quarters of 2006 of $7.2 million, as well as increased newsprint, delivery, postage and external printing expenses of $0.1 million, $0.2 million, $0.4 million and $0.3 million, respectively. Additionally, new internet initiative expenses of $0.9 million were incurred during the year ended December 31, 2006.

Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 2006 increased by $58.7 million, or 59.3%, to $157.8 million from $99.0 million for the year ended December 31, 2005. The increase in selling, general and administrative expenses

 

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was primarily due to increased selling, general and administrative expenses associated with the Copley Acquisition and the Gannett Acquisition of $37.4 million and $15.3 million, respectively. The increase was also due to selling, general and administrative expenses of the newspaper businesses acquired during the fourth quarter of 2005 and the first and second quarters of 2006 of $3.9 million, as well as an increase in non-cash compensation expense related to the issuance of our RSG’s of $1.3 million. These amounts were partially offset by a decrease in payroll, insurance, rent and franchise tax expenses of $1.0 million, $0.4 million, $0.6 million and $0.3 million, respectively.

Depreciation and Amortization. Depreciation and amortization expense for the year ended December 31, 2006 increased by $26.7 million to $54.8 million from $28.1 million for the year ended December 31, 2005. Depreciation and amortization increased due to depreciation and amortization of the Copley Acquisition and the Gannett Acquisition of $14.3 million and $10.4 million, respectively.

Transaction Costs Related to Merger and Acquisitions. We incurred approximately $10.6 million in transaction costs related to the Merger during the year ended December 31, 2005. We incurred approximately $4.4 million in transaction costs primarily related to bonuses at Enterprise NewsMedia, LLC during the year ended December 31, 2006.

Impairment of Long-Lived Assets. During the year ended December 31, 2006, we incurred a charge of $0.9 million related to the impairment of property, plant and equipment and certain intangible assets which are classified as held for sale at December 31, 2006, or disposed of during the year ended December 31, 2006.

Loss on the Sale of Assets. During the year ended December 31, 2006, we incurred a loss in the amount of $0.7 million on the disposal of real estate, equipment and certain intangibles. We expect non-cash gains and losses to continue as we sell fixed assets in an effort to increase operating efficiency consistent with our clustering strategy.

Interest Expense. Total interest expense for the year ended December 31, 2006 increased by $54.5 million to $103.9 million from $49.4 million for the year ended December 31, 2005. The increase was primarily due to increases in our outstanding debt balances.

Loss on Early Extinguishment of Debt and Write-off of Deferred Financing Costs. During the year ended December 31 2006, we incurred a $2.1 million loss due to the write-off of deferred financing costs associated with the extinguishment of our Term Loan B and second lien credit facility. Additionally, we incurred a $1.4 million loss related to the extinguishment of our debt at Enterprise NewsMedia, LLC.

During the year ended December 31, 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 early extinguishment and write-offs of deferred financing fees associated with these instruments. Additionally, a $2.0 million loss related to write-offs of deferred financing costs is associated with the issuance of a new term loan facility in January 2005 by Enterprise.

Unrealized Gain on Derivative Instrument. During the year ended December 31, 2006, we recorded a net unrealized gain of $1.2 million related to our $300 million notional amount interest rate swap, which we entered into in June 2005 in an effort to eliminate a significant portion of our exposure to fluctuations in LIBOR. For the period from January 1, 2006 through February 19, 2006, the hedge was deemed ineffective and, as a result, the increase in the fair value of $2.6 million was recognized in operations. On February 20, 2006, the swap was redesignated as a cash flow hedge for accounting purposes. During the year, a portion of the swap was deemed ineffective and a loss of $1.5 million was recognized in operations. The effective portion of the change in fair value from February 20, 2006 through December 31, 2006, was recognized in accumulated other comprehensive income.

 

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Income Tax Expense (Benefit). Income tax benefit for the year ended December 31, 2006 was $14.0 million compared to income tax expense of $8.3 million for the year ended December 31, 2005. The change of $22.3 million was primarily due to the redemption of the preferred stock in connection with the Merger in 2005. The redemption of the preferred stock eliminated the interest expense related to that liability, which resulted in the removal of an existing permanent difference between book and taxable income in accordance with SFAS No. 109. This was offset by the increase in the valuation allowance necessary due to an additional tax net operating loss and change in net deferred tax assets. In addition, we experienced an increase in deferred income tax expense as of December 31, 2005 related to the non-deductible merger costs incurred in 2005.

Net Loss. Net loss for the year ended December 31, 2006 was $28.9 million. Net loss for the year ended December 31, 2005 was $14.1 million. Our net loss increased due to the factors noted above.

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

The discussion of our results of operations that follows is based upon our historical results of operations for the year ended December 31, 2004 and our pro forma results of operations for the 12-month period ended December 31, 2005.

Revenue. Total revenue for the year ended December 31, 2005 increased by $184.9 million, or 92.4%, to $385.0 million from $200.1 million for the year ended December 31, 2004. The increase in total revenue was comprised of a $146.3 million, or 98.6%, increase in advertising revenue, a $32.6 million, or 95.8%, increase in circulation revenue, and a $6.0 million, or 34.0%, increase in commercial printing and other revenue. The increase in advertising revenue was primarily due to revenue of $142.6 million from the Massachusetts Acquisitions and $2.8 million from other acquisitions, as well as advertising revenue increases in our same property publications of $0.9 million. The increase in circulation revenue was primarily due to revenues of $33.1 million resulting from the Massachusetts Acquisitions partially offset by a $0.9 million decrease in same property publications. Circulation volume decreased 1.2% for same property publications from 2004 to 2005. The increase in commercial printing and other revenue was primarily driven by the Massachusetts Acquisitions, which contributed $4.3 million. Commercial printing and other revenue from existing operations increased by $1.3 million and other acquisitions contributed $0.5 million to commercial printing and other revenue in 2005.

Operating Costs. Operating costs for the year ended December 31, 2005 increased by $107.1 million, or 110.2%, to $204.3 million from $97.2 million for the year ended December 31, 2004. The increase in operating costs was primarily due to increased operating costs associated with the Massachusetts Acquisitions with $1.8 million associated with the other acquisitions. Increases of $0.8 million, $0.6 million, $0.4 million and $0.2 million also occurred in newsprint costs, external printing services, health insurance and utility costs, respectively, associated with our existing operations.

Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 2005 increased by $46.8 million, or 89.6%, to $99.0 million from $52.2 million for the year ended December 31, 2004. $27.0 million and $17.6 million of the increase was due to the CP Media acquisition and Enterprise acquisition, respectively. Additionally, an increase of $1.2 million was associated with other acquisitions. Health and business insurance costs increased by $1.0 million, bad debt expense increased by $0.6 million and non-cash compensation related to share-based payments increased by $1.9 million. Additionally, during the year ended December 31, 2005, the Company incurred $1.0 million in non-cash compensation expense related to the forgiveness of loans pursuant to the Merger. These increases were partially offset by the elimination of management fees of $1.5 million paid to prior owners during 2004.

 

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Depreciation and Amortization. Depreciation and amortization expense for the year ended December 31, 2005 increased $14.7 million to $28.1 million from $13.4 million for the year ended December 31, 2004. Depreciation and amortization expense increased primarily due to the Massachusetts Acquisitions. $7.5 million and $7.0 million of the increase was due to the acquisitions of CP Media and Enterprise, respectively.

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 SFAS No. 142 and SFAS No. 144, we are required to annually test our long-term assets, 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 on certain assets existed and, 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 $12.5 million, or 20.2%, to $49.4 million from $61.9 million for the year ended December 31, 2004. $9.7 million of the decrease in interest expense was due to our early extinguishment of all of our senior subordinated notes, a portion of our senior discount notes and senior preferred stock with proceeds from our 2005 Credit Facility and the early extinguishment of all of our outstanding senior debentures and preferred stock in connection with the Merger. Of the decrease, $2.8 million was due to the pro forma adjustments to eliminate interest expense on mandatorily redeemable stock.

Loss on Early Extinguishment of Debt. During the year ended December 31, 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. Additionally, $2.0 million of the loss related to the write-off of deferred financing fees were associated with the issuance of a new term loan facility in January 2005 by Enterprise.

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 $8.3 million compared to income tax expense of $1.2 million for the year ended December 31, 2004. The increase of $7.1 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 for the year ended December 31, 2005 and $3.3 million related to the Massachusetts Acquisitions.

Loss from Continuing Operations. Loss from continuing operations for the year ended December 31, 2005, was $14.1 million. Loss from continuing operations for the year ended December 31, 2004, was $30.7 million. Our loss from continuing operations decreased due to the factors noted above.

 

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Income from Discontinued Operations. Income from discontinued operations of $4.6 million for the year ended December 31, 2004 related to the February 3, 2004 acquisition from Lee Enterprises, Inc. of newspapers in Corning, New York and Freeport, Illinois in exchange for newspapers in Nevada and Idaho, which resulted in a pre-tax gain of $7.7 million and an after-tax gain of $4.6 million.

Net Loss. Net loss for the year ended December 31, 2005 was $14.1 million. Net loss for the year ended December 31, 2004 was $26.1 million. Our net loss decreased due to the factors noted above.

Liquidity and Capital Resources

Our primary cash requirements are for working capital, borrowing obligations and capital expenditures. We have no material outstanding commitments for capital expenditures. We also intend to continue to pursue our strategy of opportunistically acquiring locally focused 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 facilities.

As of May 7, 2007, we had a total of $1.195 billion of term loans outstanding under the 2007 Credit Facility (including the delayed draw term loan facility which has been fully drawn), as amended by the First Amendment, and $300.0 million of term loans outstanding under our Bridge Facility. For a description of the 2007 Credit Facility, the First Amendment and the Bridge Facility, including our interest rate margins, see “—Indebtedness.”

As a holding company, we have no operations of our own and accordingly have no independent means of generating revenue, and our internal sources of funds to meet our cash needs, including payment of expenses, are dividends and other permitted payments from our subsidiaries. Our 2007 Credit Facility and Bridge Facility impose upon us certain financial and operating covenants, including, among others, requirements that we satisfy certain quarterly financial tests, including a total leverage ratio, a minimum fixed charge ratio, 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 twelve months.

On October 30, 2006, we completed our IPO of 13,800,000 shares of common stock at a price of $18 per share, raising approximately $231.0 million, which is net of the underwriters’ discount of $17.4 million. We used a portion of the net proceeds to repay in full and terminate our $152.0 million second lien term loan credit facility under the 2006 Credit Facility. In addition, we used a portion of the net proceeds to pay down $12.0 million of the $570.0 million first lien term loan credit facility under the 2006 Credit Facility, reducing the balance and limit to $558.0 million, and to repay in full the outstanding balance of $21.3 million under our $40.0 million revolving credit facility. In connection with the termination of our $152.0 million second lien term loan credit facility under the 2006 Credit Facility and the $12.0 million reduction in borrowing capacity on the first lien term loan credit facility under the 2006 Credit Facility, we wrote off $1.4 million of deferred financing costs in the fourth quarter of 2006.

On November 3, 2006, the underwriters of our IPO exercised their option to purchase an additional 2,070,000 shares of common stock. The net proceeds of these additional shares were approximately $34.7 million. The total net proceeds from the IPO of 13,800,000 shares and this additional allotment of 2,070,000 shares were $265.7 million, before offering expenses, after deducting the underwriting discount.

 

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Cash Flows

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

The following table summarizes our historical cash flows.

 

     Three months
ended
March 31, 2006
    Three months
ended
March 31, 2007
 
     (in thousands)  

Cash provided by operating activities

   $ 1,209     $ 4,922  

Cash used in investing activities

     (102 )     (207,884 )

Cash provided by (used in) financing activities

     (3,178 )     119,217  

The discussion of our cash flows that follows is based on our historical cash flows for the three months ended March 31, 2007 and March 31, 2006.

Cash Flows from Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2007 was $4.9 million, an increase of $3.7 million when compared to the $1.2 million of cash provided by operating activities for the three months ended March 31, 2006. This $3.7 million increase was primarily the result of an increase in non-cash charges of $5.1 million, an increase in cash provided by working capital of $5.1 million, partially offset by a decrease in net income of $6.5 million.

The $5.1 million increase in non-cash charges primarily consisted of an increase in depreciation and amortization of $5.2 million, of which $3.8 million and $1.1 million related to the Massachusetts Acquisitions and other acquisitions acquired during the first quarter of 2007, an unrealized gain on derivative instruments of $2.6 million that was recognized during the three months ended March 31, 2006, an increase in non-cash compensation expense of $0.7 million, partially offset by a decrease of $4.0 million in deferred income tax liabilities.

The $5.1 million increase in cash provided by working capital for the three months ended March 31, 2007 when compared to the three months ended March 31, 2006 primarily resulted from an increase in accrued expenses, a decrease in accounts receivable, partially offset by a decrease in accounts payable.

Cash Flows from Investing Activities. During the three months ended March 31, 2007, we used $206.0 million, net of cash acquired, for acquisitions and $2.0 million for capital expenditures, which uses were partially offset by proceeds of $0.2 million from the sale of assets.

During the three months ended March 31, 2006, we used $2.9 million for capital expenditures and $0.1 million, net of cash acquired, for acquisitions, which uses were partially offset by proceeds of $2.9 million from the sale of publications and other assets.

Cash Flows from Financing Activities. Net cash provided by financing activities for the three months ended March 31, 2007 was $119.2 million. The net cash provided by financing activities primarily resulted from borrowings of $690.0 million under the 2007 Credit Facility, partially offset by the repayment of $558.0 million of borrowings under the 2006 Credit Facility, payment of dividends of $9.4 million, payment of $3.0 million of debt issuance costs in connection with the 2007 Credit Facility, and payment of $0.4 million of offering costs.

Net cash used in financing activities for the three months ended March 31, 2006 was $3.2 million from net repayments under the 2005 New Credit Facility.

 

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Changes in Financial Position

The discussion that follows highlights significant changes in our financial position and working capital from December 31, 2006 to March 31, 2007.

Accounts Receivable. Accounts receivable increased $15.7 million from December 31, 2006 to March 31, 2007, of which $18.2 million was acquired from acquisitions during the first quarter of 2007, partially offset by a decrease of $2.5 million. The $2.5 million decrease in accounts receivable primarily resulted from a decrease in sales for the last two months of the first quarter of 2007 when compared to the last two months of the fourth quarter of 2006 and the receipt of $1.0 million during the first quarter of 2007 from the sale of a publication during the fourth quarter of 2006.

Property, Plant, and Equipment. Property, plant, and equipment increased $11.7 million during the period from December 31, 2006 to March 31, 2007, of which $13.2 million was acquired from acquisitions during the first quarter of 2007 and $2.0 million was used for capital expenditures. These increases in property, plant, and equipment were partially offset by depreciation of $3.2 million, assets held for sale of $0.2 million, and an impairment of $0.1 million on long-lived assets.

Goodwill. Goodwill increased $85.8 million from December 31, 2006 to March 31, 2007, of which $82.2 million was acquired from acquisitions during the first quarter of 2007 and $3.6 million related to adjustments for tax uncertainties.

Intangible Assets. Intangible assets increased $90.4 million from December 31, 2006 to March 31, 2007, of which $96.1 million was acquired from acquisitions during the first quarter of 2007, partially offset by amortization of $5.7 million.

Accounts Payable. Accounts payable decreased $0.6 million from December 31, 2006 to March 31, 2007, of which $0.6 million was acquired from acquisitions during the first quarter of 2007. The offsetting $1.2 million decrease in accounts payable working capital primarily resulted from the timing of vendor payments.

Accrued Expenses. Accrued expenses increased $3.4 million from December 31, 2006 to March 31, 2007, of which $1.2 million was acquired from acquisitions during the first quarter of 2007. The remaining accrued expenses increase of $2.2 million primarily resulted from an increase of $1.3 million in income taxes payable, an increase of $0.6 million in accrued expenses associated with being a public company, and a net increase of $0.3 million in other accrued expenses.

Long-term Debt. Long-term debt increased $132.0 million from December 31, 2006 to March 31, 2007, primarily resulting from borrowings of $690.0 million under the 2007 Credit Facility, partially offset by repayments of $558.0 million under the 2006 Credit Facility.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

The following table summarizes the historical cash flows for GateHouse Media, Inc. See “—Predecessor and Successor” above for a discussion of the use of financial information in the table.

 

    

Period from

January 1,

2005 to

June 5,

2005

   

Period from

June 6,

2005 to

December 31,

2005

   

Year Ended

December 31,

2006

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

Cash provided by (used in) continuing operating activities

   $ (572 )   $ (11,814 )   $ 25,217  

Cash used in continuing investing activities

     (1,095 )     (40,581 )     (428,838 )

Cash provided by (used in) continuing financing activities

     (260 )     54,109       490,860  

 

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The discussion of our cash flows that follows is based on our historical cash flows for the Successor Period of the year ended December 31, 2006, the Successor Period of June 6, 2005 to December 31, 2005 and the Predecessor Period of January 1, 2005 to June 5, 2005.

Cash Flows from Operating Activities. Net cash provided by operating activities for the year ended December 31, 2006 was $25.2 million. The net cash provided by operating activities resulted from depreciation and amortization of $24.1 million, a loss of $2.1 million on the early extinguishment of debt, non-cash compensation of $1.8 million, an impairment of long-lived assets of $0.9 million, a net increase of $0.5 million in working capital, a loss of $0.7 million on the sale of assets, an unrecognized loss of $0.7 million from pension and other postretirement benefit obligations, amortization of deferred financing costs of $0.5 million, partially offset by a decrease of $3.4 million related to deferred income taxes, a net loss of $1.6 million, and an unrealized gain of $1.2 million on derivative instruments. The increase in working capital primarily resulted from an increase in accounts payable and a decrease in prepaid expenses and other assets, partially offset by an increase in accounts receivable from December 31, 2005 to December 31, 2006.

Net cash used in operating activities for the period from June 6, 2005 to December 31, 2005 was $11.8 million. The net cash used in operating activities primarily resulted from accrued interest of $21.1 million on senior debentures related to the Merger, an unrealized gain of $10.8 million on a derivative instrument and a net decrease in working capital of $4.9 million, partially offset by net income of $9.6 million, depreciation and amortization of $8.0 million and a net decrease of $6.9 million in deferred tax assets. The decrease in working capital primarily resulted from a decrease in accrued expenses, excluding accrued interest, from June 6, 2005 to December 31, 2005.

Net cash used in operating activities for the period from January 1, 2005 to June 5, 2005 was $0.6 million. The net cash used in operating activities primarily resulted from a net loss of $24.8 million, a net increase of $3.5 million in deferred tax assets and a net decrease of $3.0 million in working capital, partially offset by interest expense of $13.5 million from mandatorily redeemable preferred stock, depreciation and amortization of $5.8 million, a loss of $5.5 million on the early extinguishment of debt, issuance of $4.8 million of senior debentures in lieu of paying interest and $1.0 million of non-cash transaction costs related to the Merger. The decrease in working capital primarily resulted from a decrease in accrued expenses from December 31, 2004 to June 5, 2005.

Cash Flows from Investing Activities. Net cash used in investing activities for the year ended December 31, 2006 was $428.8 million. During the year ended December 31, 2006, we used $413.1 million, net of cash acquired, for the Massachusetts Acquisitions, $11.8 million, net of cash acquired, for other acquisitions and $8.4 million for capital expenditures, which uses were partially offset by proceeds of $4.5 million from the sale of publications and other assets.

Net cash used in investing activities for the period from June 6, 2005 to December 31, 2005 was $40.6 million. During the period from June 6, 2005 to December 31, 2005, we used $23.9 million, net of cash acquired, in the Merger, $15.1 million, net of cash acquired, in other acquisitions, and $5.0 million for capital expenditures, which uses were partially offset by proceeds of $3.4 million from the sale of publications and other assets.

Net cash used in investing activities for the period from January 1, 2005 to June 5, 2005 was $1.1 million. The cash we used in investing activities during the period from January 1, 2005 to June 5, 2005 primarily consisted of capital expenditures of $1.0 million.

Cash Flows from Financing Activities. Net cash provided by financing activities for the year ended December 31, 2006 was $490.9 million. The net cash provided by financing activities primarily resulted from net borrowings of $549.5 million under the 2006 Credit Facility and the issuance of

 

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common stock of $265.9, primarily from the IPO, net of underwriters’ discount, partially offset by the repayment of $304.4 million of borrowings under the 2005 Credit Facility, payment of $9.2 million of dividends, payment of $7.2 million of debt issuance costs in connection with the 2006 Credit Facility, and payment of $3.7 million of offering costs.

Net cash provided by financing activities for the period from June 6, 2005 to December 31, 2005 was $54.1 million. The net cash provided by financing activities primarily resulted from capital contributions of $222.0 million in connection with the Merger and net borrowings under the 2005 Credit Facility of $36.4 million, partially offset by the extinguishment of $203.5 million of preferred stock and senior debentures in connection with the Merger and payment of debt issuance costs of $0.8 million in connection with the 2005 Credit Facility.

Net cash used in financing activities for the period from January 1, 2005 to June 5, 2005 was $0.3 million. The net cash used in financing activities resulted from the extinguishment of $214.4 million of senior subordinated notes, senior discount notes, and senior preferred stock and payment of $2.4 million of debt issuance costs in connection with the 2005 Credit Facility, partially offset by net borrowings under the 2005 Credit Facility of $216.4 million.

Changes in Financial Position

The discussion that follows highlights significant changes in our financial position from December 31, 2005 to December 31, 2006.

Accounts Receivable. Accounts receivable increased $20.4 million from December 31, 2005 to December 31, 2006, of which $17.6 million and $0.9 million was acquired from the Massachusetts Acquisitions and other acquisitions, respectively. The remaining accounts receivable increase from December 31, 2005 to December 31, 2006 primarily resulted from an increase in sales for the last two months of the fourth quarter ended December 31, 2006 when compared to the last two months of the fourth quarter ended December 31, 2005.

Prepaid Expenses. Prepaid expenses increased $2.0 million from December 31, 2005 to December 31, 2006 to $3.4 million, of which $3.0 million was acquired from the Massachusetts Acquisitions. The partially offsetting decrease primarily resulted from the timing of insurance and rent payments.

Property, Plant, and Equipment. Property, plant, and equipment increased $38.4 million during the period from December 31, 2005 to December 31, 2006, of which $42.4 million, $2.9 million and $8.4 million of the increase resulted from the Massachusetts Acquisitions, other acquisitions and capital expenditures, respectively, partially offset by depreciation of $8.7 million and sales and disposals of assets of $6.6 million.

Goodwill. Goodwill increased $200.0 million from December 31, 2005 to December 31, 2006, of which $229.3 million and $3.1 million of the increase resulted from the Acquisitions and other acquisitions, respectively, partially offset by a reduction of $32.4 million related to the deferred tax valuation allowance.

Intangible Assets. Intangible assets increased $174.0 million from December 31, 2005 to December 31, 2006, of which $186.5 million and $5.1 million of the increase resulted from the Massachusetts Acquisitions and other acquisitions, respectively, partially offset by amortization of $15.3 million and sales of assets of $2.3 million.

Accounts Payable. Accounts payable increased $4.0 million from December 31, 2005 to December 31, 2006, of which $2.4 million was acquired from the Massachusetts Acquisitions. The

 

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remaining accounts payable increase of $1.6 million from December 31, 2005 to December 31, 2006 primarily resulted from an overall increase in general and administrative expenses, including integration and reorganization costs. The remaining accounts payable increase is also associated with one of our June 6, 2006 acquisitions. When we acquired CP Media on June 6, 2006, CP Media’s accounts payable balance was relatively low due to payments made immediately prior to the acquisition.

Long-term Debt. Long-term debt increased $256.6 million from December 31, 2005 to December 31, 2006, primarily resulting from net borrowings of $558.0 million under the first term loan under the 2006 Credit Facility, partially offset by the extinguishment of $304.4 million under the 2005 Credit Facility. The current portion of long-term debt of $3.1 million as of December 31, 2005 was repaid before the 2006 Financing.

Additional Paid-in Capital. Additional paid-in capital increased $259.8 million from December 31, 2005 to December 31, 2006, which primarily resulted from the issuance of common stock from the IPO of $261.4 million (excess of par value), net of underwriters’ discount and offering costs, non-cash compensation of $1.8 million, partially offset by a reclassification of deferred compensation of $3.9 million.

Indebtedness

2007 Credit Facility. GateHouse Media Operating, Inc. (“Operating”), an indirect wholly owned subsidiary of the Company, GateHouse Media Holdco, Inc. (“Holdco”), a direct wholly owned subsidiary of the Company, and certain of their subsidiaries are parties to an Amended and Restated Credit Agreement, dated as of February 27, 2007, with a syndicate of financial institutions with Wachovia Bank, National Association as administrative agent. The 2007 Credit Facility amended and restated the 2006 Credit Facility.

The 2007 Credit Facility provides for a (i) $670.0 million term loan facility that matures on August 28, 2014, (ii) a delayed draw term loan facility of up to $250.0 million that matures on August 28, 2014, and (iii) a revolving loan 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 February 28, 2014. The borrowers used proceeds of the 2007 Credit Facility to finance the acquisition of SureWest, to refinance existing indebtedness and for working capital and other general corporate purposes, including, without limitation, financing acquisitions permitted under the 2007 Credit Facility. The 2007 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) 65% 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 2007 Credit Facility are guaranteed, subject to specified limitations, by Holdco, Operating and their present and future direct and indirect domestic restricted subsidiaries.

As of May 7, 2007, (i) $670.0 million was outstanding under the term loan facility, (ii) $250.0 million was outstanding under the delayed draw term loan facility and (iii) no borrowings were outstanding under the revolving credit facility (without giving effect to $3.4 million of outstanding but undrawn letters of credit on such date). Borrowings under the 2007 Credit Facility bear interest, at the borrower’s option, equal to the LIBOR Rate for a LIBOR Rate Loan (as defined in the 2007 Credit Facility), or the Alternate Base Rate for an Alternate Base Rate Loan (as defined in the 2007 Credit Facility), plus an applicable margin. The applicable margin for LIBOR Rate term loans and Alternate

 

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Base Rate term loans, as amended by the First Amendment, is 2.00% and 1.00%, respectively. The applicable margin for revolving loans is adjusted quarterly based upon Holdco’s Total Leverage Ratio (as defined in the 2007 Credit Facility) (i.e., the ratio of Holdco’s Consolidated Indebtedness (as defined in the 2007 Credit Facility) on the last day of the preceding quarter to Consolidated EBITDA (as defined in the 2007 Credit Facility) for the four fiscal quarters ending on the date of determination). The applicable margin ranges from 1.50% to 2.00%, in the case of LIBOR Rate Loans and 0.50% to 1.00% in the case of Alternate Base Rate Loans. Under the revolving loan facility we also pay a quarterly commitment fee on the unused portion of the revolving loan 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. In addition, we are required to pay a ticking fee at the rate of 0.50% of the aggregate unfunded amount available to be borrowed under the delayed draw term facility.

No principal payments are due on the term loan facilities or the revolving credit facility until the applicable maturity date. The borrowers are required to prepay borrowings under the term loan facilities in an amount equal to 50.0% of Holdco’s Excess Cash Flow (as defined in the Credit Agreement) 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 such fiscal year. In addition, the borrowers are required to prepay borrowings under the term loan facilities with asset disposition proceeds in excess of specified amounts to the extent necessary to cause Holdco’s Total Leverage Ratio to be less than or equal to 6.25 to 1.00, and with cash insurance proceeds and condemnation or expropriation awards, in excess of specified amounts, subject, in each case, to reinvestment rights. The borrowers are required to prepay borrowings under the term loan facilities with the net proceeds of equity issuances by the Company in an amount equal to the lesser of (i) the amount by which 50.0% of the net cash proceeds exceeds the amount (if any) required to repay any credit facilities of GateHouse Media, Inc. or (ii) the amount of proceeds required to reduce Holdco’s Total Leverage Ratio to 6.0 to 1.0. The borrowers are also required to prepay borrowings under the term loan facilities with 100% of the proceeds of debt issuances (with specified exceptions) except that no prepayment is required if Holdco’s Total Leverage Ratio is less than 6.0 to 1.0. If the term loan facilities have been paid in full, mandatory prepayments are applied to the repayment of borrowings under the swingline facility and revolving credit facilities and the cash collateralization of letters of credit.

The 2007 Credit Facility contains a financial covenant that requires Holdco to maintain a Total Leverage Ratio of less than or equal to 6.5 to 1.0 at any time an extension of credit is outstanding under the revolving credit facility. The 2007 Credit Facility contains affirmative and negative covenants applicable to Holdco, Operating and their restricted subsidiaries customarily found in loan agreements for similar transactions, including restrictions on their ability to incur indebtedness (which we are generally permitted to incur so long as we satisfy an incurrence test that requires us to maintain a pro forma Total Leverage ratio of less than 6.5 to 1.0), 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 Holdco is permitted to (i) make restricted payments (including quarterly dividends) so long as, after giving effect to any such restricted payment, Holdco and its subsidiaries have a Fixed Charge Coverage Ratio equal to or greater than 1.0 to 1.0 and would be able to incur an additional $1.00 of debt under the incurrence test referred to above and (ii) make restricted payments of proceeds of asset dispositions to us to the extent such proceeds are not required to prepay loans under the 2007 Credit Facility and/or cash collateralize letter of credit obligations and such proceeds are used to prepay borrowings under acquisition credit facilities of GateHouse). The 2007 Credit Facility also permits the borrowers, in certain limited circumstances, to designate subsidiaries as “unrestricted subsidiaries” which are not subject to the covenant restrictions in the 2007 Credit Facility. The 2007 Credit Facility contains customary events of default, including defaults based on a failure to pay principal, reimbursement

 

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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-accelerations; a Change of Control (as defined in the 2007 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 additional credit, the 2007 Credit Facility provides that the borrowers may increase the amounts available under the revolving facility and/or the term loan facilities.

First Amendment to 2007 Credit Facility. On May 7, 2007, we entered into the First Amendment to amend the 2007 Credit Facility. The First Amendment provided an incremental term loan facility under the 2007 Credit Facility in the amount of $275.0 million the proceeds of which were used to finance a portion of the Gannett Acquisition. As amended by the First Amendment, the 2007 Credit Facility includes $1.195 billion of term loan facilities and a $40.0 million revolving credit facility. The incremental term loan facility amortizes at the same rate and matures on the same date as the existing term loan facilities under the 2007 Credit Facility. Interest on the incremental term loan facility accrues at a rate per annum equal to, at the option of the borrower, (a) adjusted LIBOR plus a margin equal to (i) 2.00%, if the corporate family ratings and corporate credit ratings of Operating by Moody’s Investor Service Inc. (“Moody’s”) and Standard & Poor’s Rating Services (“S&P”), are at least B1 and B+, respectively, in each case with stable outlook or (ii) 2.25%, otherwise, or (b) the greater of the prime rate set by Wachovia Bank, National Association, or the federal funds effective rate plus 0.50%, plus a margin 1.00% lower than that applicable to adjusted LIBOR-based loans. Any voluntary or mandatory repayment of the First Amendment term loans made with the proceeds of a new term loan entered into for the primary purpose of benefiting from a margin that is less than the margin applicable as a result of the First Amendment will be subject to a 1.00% prepayment premium. The First Amendment term loans are subject to a “most favored nation” interest provision that grants the First Amendment term loans an interest rate margin that is 0.25% less than the highest margin of any future term loan borrowings under the 2007 Credit Facility.

As previously noted, the First Amendment also modified the interest rates applicable to the term loans under the 2007 Credit Facility. Term loans thereunder accrue interest at a rate per annum equal to, at the option of the Borrower, (a) adjusted LIBOR plus a margin equal to 2.00% or (b) the greater of the prime rate set by Wachovia Bank, National Association, or the federal funds effective rate plus 0.50%, plus a margin equal to 1.00%. The terms of the previously outstanding borrowings were also modified to include a 1.00% prepayment premium corresponding to the prepayment premium applicable to the First Amendment term loans and a corresponding “most favored nation” interest provision.

Bridge Loan. On April 11, 2007, we entered into the Bridge Facility with a syndicate of financial institutions with Wachovia Investment Holdings, LLC, as administrative agent.

The Bridge Facility provides for a $300 million term loan facility that matures on April 11, 2015. We used the proceeds of the loan facility to partly finance the Gannett Acquisition and the Copley Acquisition, and pay fees and expenses. The Bridge Facility is secured by a first priority security interest in all present and future capital stock of Holdco owned by us and all proceeds thereof.

Borrowings under the Bridge Facility bear interest, at the borrower’s option, at a floating rate equal to the LIBOR Rate for a LIBOR Rate Loan (as defined in the Bridge Facility), or the Base Rate for a Base Rate Loan (as defined in the Bridge Facility), plus an applicable margin. During the first year of the facility, until April 11, 2008 (the “Pricing Step-Up Date”), the applicable margin for LIBOR Rate

 

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term loans and Base Rate term loans, is 1.50% and 0.50%, respectively. On the Pricing Step-Up Date and quarterly thereafter until the maturity date, the applicable margin for LIBOR Rate term loans and Base Rate term loans will be determined by reference to a pricing grid which is based upon (i) our Total Leverage Ratio (as defined in the Bridge Facility) and (ii) the ratings provided by Moody’s and by S&P for the Bridge Facility, or if the Bridge Facility has not been rated, for the corporate family of GateHouse. If the ratings for the Bridge Facility by Moody’s is at least B3 and by S&P is at least B- (or if the Bridge Facility has not been rated, the corporate family rating of GateHouse and its subsidiaries is at least B1 by Moody’s and at least B+ by S&P), the applicable margin for LIBOR Rate term loans and Base Rate term loans will range from 3.50% to 4.25% and 2.50% to 3.25%, respectively; otherwise the applicable margin for LIBOR Rate term loans and Base Rate term loans will range from 4.00% to 4.75% and 3.0% to 3.75%, respectively.

No principal payments are due on the Bridge Facility until the maturity date. We are required to prepay borrowings under the Bridge Facility with (a) 100% of the net cash proceeds from the issuance or incurrence of debt by us and our restricted subsidiaries, (b) 100% of the net cash proceeds from any issuances of equity by us or any of our restricted subsidiaries and (c) 100% of the net cash proceeds of assets sales and dispositions by us and our subsidiaries, except, in the case of each of clause (a), (b) and (c), to the extent such proceeds are required to be applied to prepay indebtedness incurred under or are permitted to be reinvested under the terms of the 2007 Credit Facility. We may voluntarily prepay the Bridge Loan at any time. If we prepay the Bridge Loan before April 11, 2008, we will not be required to pay a prepayment premium. With respect to voluntary or mandatory prepayments thereafter, we will be required to pay a premium equal to (a) 102% of the principal amount being prepaid if such prepayment is made after April 11, 2008 but on or before April 11, 2009 and (b) 101% of the principal amount being prepaid if such prepayment is made after April 11, 2009 but on or prior to April 11, 2010. No prepayment premium will be assessed thereafter.

The Bridge Facility contains affirmative and negative covenants applicable to us and our restricted subsidiaries customarily found in loan agreements for similar transactions, including restrictions on our ability to incur indebtedness (which we are generally permitted to incur so long as we satisfy an incurrence test that requires us to maintain a pro forma Total Leverage Ratio of not greater than 8.25 to 1.00 and which GateHouse is only permitted to incur indebtedness if the proceeds of such indebtedness are used to prepay the Bridge Loan), 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 GateHouse is permitted to make restricted payments (including quarterly dividends) so long as, after giving effect to any such restricted payment, we would be able to incur an additional $1.00 of debt under the incurrence test referred to above). The Bridge Facility also permits us, in certain limited circumstances, to designate subsidiaries as “unrestricted subsidiaries” which are not subject to the covenant restrictions in the Bridge Facility. The Bridge 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-accelerations; a Change of Control (as defined in the Bridge Facility); events of bankruptcy and insolvency; material judgments; failure to meet certain requirements with respect to ERISA; and impairment of collateral.

In connection with the Bridge Facility, we pledged certain assets for the benefit of the secured parties as collateral security for the payment and performance of its obligations under the Bridge Facility. The pledged assets include, among other things (i) all present and future capital stock or other membership, equity, ownership or profits interest of GateHouse in all of its direct domestic restricted subsidiaries and (ii) 65% of the voting stock (and 100% of the nonvoting stock) all of present and future first-tier foreign subsidiaries.

 

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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, 2006:

 

    2007   2008   2009   2010   2011   Thereafter   Total
    (in thousands)

First lien credit facility

  $ 42,408   $ 42,408   $ 42,408   $ 42,408   $ 42,408   $ 639,871   $ 851,911

Noncompete payments

    177     151     111     17     —       —       456

Operating lease obligations

    4,736     4,715     4,426     4,159     2,389     8,487     28,912
                                         

Total

  $ 47,321   $ 47,274   $ 46,945   $ 46,584   $ 44,797   $ 648,358   $ 881,279
                                         

On February 27, 2007, we entered into the 2007 Credit Facility. The 2007 Credit Facility provides for a (i) $670.0 million term loan facility that matures on August 28, 2014, (ii) delayed draw term loan of up to $250.0 million that matures on August 28, 2014 and (iii) revolving credit agreement with a $40.0 million aggregate loan commitment available, including a $15.0 million sub-facility for letters of credit and a $10.0 million swingline facility, which matures in February, 2014.

On April 11, 2007, we entered into the Bridge Facility with a syndicate of financial institutions with Wachovia Investment Holdings, LLC as administrative agent. The Bridge Credit Agreement provides for a $300 million term loan facility which matures on April 11, 2015.

On May 7, 2007, we entered into the First Amendment to amend our 2007 Credit Facility and increased our borrowing by $275.0 million.

For a description of the 2007 Credit Facility, the First Amendment and the Bridge Facility, including our interest rate margins, see “—Indebtedness.”

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, provides a market-based framework for measuring fair value, and expands disclosure requirements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact the adoption of SFAS No. 157 will have on our consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”). SAB No. 108 provides guidance on the consideration of the effects of prior year uncorrected misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB No. 108 does not change the staff’s previous guidance in SAB 99 on evaluating the materiality of misstatements. SAB No. 108 is effective for the interim period of the first fiscal year ending after November 15, 2006. The adoption of SAB No. 108 did not have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits companies to measure financial

 

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instruments and certain other items at fair value. The objective of this statement is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is expected to expand the use of fair value measurement for accounting for financial instruments. SFAS No. 159 is effective for financial statements issued as of the beginning of the first fiscal year that begins after November 15, 2007. We are currently evaluating the impact the adoption of SFAS No. 159 will have on our consolidated financial statements.

In May 2007, the FASB issued Staff Position No. 48-1, Definition of Settlement in FASB Interpretation No. 48, (“FIN 48-1”) which is an amendment to FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. FIN 48-1 provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FIN 48-1 became effective during the first quarter of 2007 and did not have a material impact on our consolidated financial statements.

Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this report, 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:

 

   

income tax expense (benefit);

 

   

depreciation and amortization; and

   

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.

 

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Limitations of Adjusted EBITDA

Adjusted EBITDA has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings or cash flows. Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA and using this non-GAAP financial measure as compared to GAAP net income (loss), include: the cash portion of interest 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 report. 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 report, 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

   

Year

Ended

December 31,

2006

   

Three
Months
Ended
March 31,
2006

    Three
Months
Ended
March 31,
2007
    Year Ended
December 31,
2006
    Three
Months
Ended
March 31,
2007
    Year Ended
December 31,
2006
    Three
Months
Ended
March 31,
2007
 
    2003     2004                    
    (Predecessor)     (Predecessor)     (Predecessor)     (Successor)     (Successor)     (Successor)     (Successor)     (Pro forma)     (Pro forma)     (Pro forma as
Adjusted)
    (Pro forma
as Adjusted)
 

Income (loss) from continuing operations

  $ (14,650 )   $ (30,711 )   $ (24,831 )   $ 9,565     $ (1,574 )   $ 405     $ (6,079 )   $ (28,938 )   $ (13,250 )   $ (16,488 )   $ (10,138 )

Income tax expense (benefit)

    (4,691 )     1,228       (3,027 )     7,050       (3,273 )     368       (2,486 )     (13,953 )     (7,081 )     (5,943 )     (5,078 )

Write-off of deferred offering costs

    1,935       —         —         —         —         —         —         —         —         —         —    

Write-off of deferred financing costs

    161       —         —         —         —         —         —         —         —         —         —    

Unrealized (gain) loss on derivative instrument

    —         —         —         (10,807 )     (1,150 )     (2,605 )     383       (1,150 )     383       (1,150 )     383  

Loss on early extinguishment of debt

    —         —         5,525       —         2,086       —         —         3,449       —         3,449       —    

Amortization of deferred financing costs

    1,810       1,826       643       67       544       30       223       4,397       317       4,397       317  

Interest expense—dividends on mandatorily redeemable preferred stock

    13,206       29,019       13,484       —         —         —         —         —         —         —         —    

Interest expense—debt

    32,433       32,917       13,232       11,760       35,994       5,176       10,217       103,933       25,983       83,473       20,868  

Impairment of long-lived assets

    —         1,500       —         —         917       —         119       917       119       917       119  

Transaction costs related to Merger and the Massachusetts Acquisitions

    —         —         7,703       2,850       —         —         —         4,420       —         4,420       —    

Depreciation and amortization

    13,359       13,374       5,776       8,030       24,051       3,599       8,802       54,795       14,977       54,795       14,977  
                                                                                       

Adjusted EBITDA

  $ 43,563 (a)   $ 49,153 (b)   $ 18,505 (c)   $ 28,515 (d)   $ 57,595 (e)   $ 6,973 (f)   $ 11,179 (g)   $ 127,870 (h)(i)   $ 21,448 (j)(i)   $ 127,870     $ 21,448  
                                                                                       

 

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(a) Adjusted EBITDA for the year ended December 31, 2003 includes a total of $1,610 net expense, which is comprised of non-cash compensation and other expense of $26, management fees paid to prior owners of $1,480 and a loss of $104 on the sale of assets.

 

(b) Adjusted EBITDA for the year ended December 31, 2004 includes a total of $1,076 net expense, which is comprised of management fees paid to prior owners of $1,480 and a loss of $30 on the sale of assets, partially offset by $434 of other income.

 

(c) Adjusted EBITDA for the period from January 1, 2005 to June 5, 2005 includes a total of $1,564 net expense, which is comprised of non-cash compensation and other expense of $796 and management fees paid to prior owners of $768.

 

(d) Adjusted EBITDA for the period from June 6, 2005 to December 31, 2005 includes a total of $1,643 net expense, which is comprised of non-cash compensation and other expense of $681 and integration and reorganization costs of $1,002, which are partially offset by a $40 gain on the sale of assets.

 

(e) Adjusted EBITDA for the year ended December 31, 2006 includes a total of $11,109 net expense, which is comprised of non-cash compensation and other expense of $5,175, non-cash portion of postretirement benefit expense of $748, integration and reorganization costs of $4,486 and a $700 loss on the sale of assets.

 

(f) Adjusted EBITDA for the three months ended March 31, 2006 includes a total of $2,855 net expense, which is comprised of non-cash compensation and other expense of $704, integration and reorganization costs of $1,710 and a $441 loss on the sale of assets.

 

(g) Adjusted EBITDA for the three months ended March 31, 2007 includes a total of $4,333 net expense, which is comprised of non-cash compensation and other expense of $2,153, non-cash portion of postretirement benefits expense of $314, integration and reorganization costs of $838, a $13 loss on the sale of assets and the impact of SureWest purchase accounting of $1,015.

 

(h) Pro forma Adjusted EBITDA for the year ended December 31, 2006 includes a total of $27,803 net expense, which is comprised of non-cash compensation and other expense of $6,927, non-cash portion of postretirement benefits expense of $1,615, lease abandonment costs and amortization of prepaid rent at CP Media of $270, integration and reorganization costs of $6,729, a $700 loss on the sale of assets, pension, health and supplemental employee retirement plan expenses of $1,727 (these plans were not assumed in the acquisition by GateHouse), corporate and third party charges not assumed by GateHouse of $6,419 and severance expense of $3,416.

 

(i) Excludes revenue and expenses related to the group of assets and liabilities from the Gannett Acquisition held for sale.

 

(j) Pro forma Adjusted EBITDA for the three months ended March 31, 2007 includes a total of $7,527 net expense, which is comprised of non-cash compensation and other expense of $2,346, non-cash portion of postretirement benefits expense of $314, integration and reorganization costs of $838, a $13 loss on the sale of assets, the impact of SureWest purchase accounting of $1,015, pension, health and supplemental employee retirement plan expenses of $340 (these plans were not assumed in the acquisition by GateHouse), corporate and third party charges not assumed by GateHouse of $1,796 and severance expense of $865.

 

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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 $0.2 million, based on outstanding floating rate debt of $690.0 million outstanding at March 31, 2007, after consideration of the interest rate swaps of $670.0 million described below.

In June 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.

In May 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.

In February 2007, we executed an additional interest rate swap in the notional amount of $100 million with a forward starting date of March 1, 2007. The interest rate swap has a term of seven years. Under the swap, we pay an amount to the swap counterparty representing interest on a notional amount at a rate of 5.14% and receive an amount from the swap counterparty representing interest on the notional amount at a rate equal to the one-month LIBOR. These interest rate swaps effectively fix our interest rate on $670.0 million of our variable rate debt for the term of the swaps.

In connection with the 2007 Credit Facility, the Company entered into and designated an interest rate swap based on a notional amount of $250 million maturing September 2014, as a cash flow hedge. Under the swap agreement, the Company receives interest equivalent to one month LIBOR and pays a fixed rate of 4.971% with settlements occurring monthly.

In connection with the First Amendment, the Company entered into and designated an interest rate swap based on a notional amount of $200 million maturing September 2014, as a cash flow hedge. Under the swap agreement, the Company receives interest equivalent to one month LIBOR and pays a fixed rate of 5.079% with settlements occurring monthly.

At May 7, 2007, after consideration of the forward starting interest rate swaps described above, $375.0 million of the remaining principal amount of our debt is subject to floating interest rates. A 1% change in the interest rate on our floating rate debt would impact annual interest expense by $3.75 million.

For a description of the 2007 Credit Facility, the First Amendment and the Bridge Facility, including our interest rate margins, see “—Indebtedness.”

 

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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 $0.9 million based on pro forma as adjusted newsprint usage for the year ended December 31, 2006 of approximately 88,000 metric tons.

 

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BUSINESS

General Overview

We are one of the largest publishers of locally-focused print and online media in the United States as measured by number of daily 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. On May 9, 2005, FIF III Liberty Holdings LLC, an affiliate of Fortress, entered into an agreement and plan of merger with us pursuant to which a wholly-owned subsidiary of FIF III Liberty Holdings LLC merged with and into us.

Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve. As of May 7, 2007, our portfolio of products, which includes 470 community publications and more than 245 related websites, and seven yellow page directories, served over 173,000 business advertising accounts and reached approximately 10 million people on a weekly basis.

Our core products include:

 

  Ÿ  

87 daily newspapers with total paid circulation of approximately 818,000;

 

  Ÿ  

248 weekly newspapers (published up to three times per week) with total paid circulation of approximately 538,000 and total free circulation of approximately 691,000;

 

  Ÿ  

135 “shoppers” (generally advertising-only publications) with total circulation of approximately 2.5 million;

 

  Ÿ  

more than 245 locally focused websites, which extend our franchises onto the internet; and

 

  Ÿ  

seven yellow page directories with a distribution of approximately 758,000 that covers a population of approximately two million people.

In addition to our core products, we produce niche publications that address specific local market interests such as recreation, sports, healthcare and real estate. During the last 12 months, we created 79 niche publications.

Our print and online products focus on the local community from both a content and advertising standpoint. As a result of our focus on small and midsize markets, we are usually the primary, and sometimes the sole, provider of comprehensive and in-depth local 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.

More than 70% of our daily newspapers have been published for more than 100 years and 90% 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. As a result of these factors, our publications have high audience penetration rates in our markets, thereby providing advertisers with strong local market reach.

We have a strong history of growth through acquisitions and new product launches. Since our inception, we have acquired 343 daily and weekly newspapers, shoppers and directories and launched numerous new products, including ten weekly newspapers. This strategy has been a critical component of our growth, and we expect to continue to pursue it in the future. We believe 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.

 

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As of May 7, 2007, we operated in 335 markets across 20 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 we believe 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 operating profit margins.

Our advertising revenue tends to be stable and recurring because of our geographic diversity, with our revenues coming from markets across 20 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.

Locally focused media in small and midsize communities is distinct from national and urban media delivered through outlets such as television, radio, metropolitan and national newspapers and the internet. Larger 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 generally produce stable revenues and operating profit 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.

 

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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.

According to Dirks, Van Essen & Murray, there are only 12 companies that own more than 25 daily newspapers each and only five (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.

We believe our community based publications exhibit a more stable financial profile than suburban and national publications. According to the 2005 Inland Cost & Revenue Study, small and midsized newspapers have exhibited more stable newspaper revenue growth than larger suburban and national newspapers as reflected by the compounded annual growth rates (“CAGR”) demonstrated below.

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Advertising Market

In 2006, the entire U.S. advertising market generated approximately $292 billion in revenue. We believe the locally oriented segment generated approximately $101 billion, or 35%, of this revenue.

U.S. Advertising Expenditures by Media Category(1)

 

Media Category

  1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006
    (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   $ 22,121

Classified (Local)

    13,742     15,065     16,773     17,873     18,650     19,608     16,622     15,898     15,801     16,608     17,312     16,986
                                                                       

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     39,107

National

    4,251     4,667     5,315     5,721     6,732     7,653     7,004     7,210     7,797     8,083     7,910     7,505
                                                                       

Total Newspapers

    36,092     38,076     41,330     43,925     46,289     48,670     44,305     44,102     44,939     46,703     47,409     46,612

Direct Mail

    32,866     34,509     36,890     39,620     41,403     44,591     44,725     46,067     48,370     52,191     55,218     58,642

Broadcast TV

    32,720     36,046     36,893     39,173     40,011     44,802     38,881     42,068     41,932     46,264     44,293     46,880

Cable TV

    5,108     6,438     7,237     10,340     12,570     15,455     15,736     16,297     18,814     21,527     23,654     25,025

Radio

    11,470     12,412     13,794     15,430     17,681     19,848     18,369     19,409     19,603     20,013     20,071     20,143

Magazines

    8,580     9,010     9,821     10,518     11,433     12,370     11,095     10,995     11,435     12,247     12,847     13,168

Yellow Pages

    10,176     10,731     11,423     12,003     12,825     13,524     14,384     14,584     14,906     15,486     15,970     16,453

Outdoor

    3,500     3,760     4,047     4,413     4,832     5,235     5,193     5,232     5,504     5,834     6,301     6,805

Business Papers

    3,559     3,808     4,109     4,232     4,274     4,915     4,468     3,976     4,004     4,072     4,170     4,195

Internet

    —       267     907     1,920     4,621     8,087     7,134     6,010     7,267     9,626     12,542     16,800

Miscellaneous(2)

    20,943     22,560     23,940     28,500     28,490     32,083     29,895     30,730     31,990     34,645     35,692     37,321

Total Local

    68,753     73,347     78,635     85,902     89,849     95,590     90,141     92,124     93,927     98,020     99,857     101,039

Total National

    96,261     104,270     111,756     124,172     134,580     153,990     144,044     147,346     154,837     170,588     178,310     191,005
                                                                       

Total

  $ 165,014   $ 177,617   $ 190,391   $ 210,074   $ 224,429   $ 249,580   $ 234,185   $ 239,470   $ 248,764   $ 268,608   $ 278,167   $ 292,044

(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.

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 well positioned to capitalize on their existing market franchise and grow their total audience base by publishing proprietary local content online. Local online media sites now include 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.

 

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According to a Belden Associates study of local news web sites released in May 2006, building a strong local online business extends the core audience of a local publication an average of 13% to 15%. Market-based telephone surveys by the same group put that extended reach estimate as high as 19%. The site study also showed that the two primary drivers attracting visitors to a local media site were sections displaying “Local news of the day” and “Breaking news.”

The opportunity created by the 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. In addition, we believe that national advertisers have an 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

According to the Newspaper Association of America, overall daily newspaper circulation, including national and urban newspapers, has declined at an average annual rate of 0.5% since 1996 and 0.8% during the three year period from 2002 to 2004. 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 2005.

 

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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 in the communities we serve as the leading, and often sole provider of comprehensive and in-depth local content. This has resulted in strong reader loyalty 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.

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

 

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marketing messages. The concentrated local focus of our portfolio 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 strong local market reach.

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. As of May 7, 2007, we served over 173,000 business advertising accounts in our publications, and our top 20 advertisers contributed less than 5% of our pro forma total revenue in 2006, with the largest advertiser contributing less than 1%. In addition, over 1.8 million classified advertisements were placed in our publications in 2006. Additionally, over 1.2 million and 750,000 classified advertisements were placed in 2006 in the publications we acquired from Copley and Gannett, respectively. Second, having operations in 335 markets across 20 states (as of May 7, 2007) 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 6.4% of our pro forma total revenues in 2006. Finally, over 94% of our pro forma total advertising revenue in 2006 was derived from local advertising, which tends to be less volatile than national and major account advertising.

Scale Yields Higher Operating Profit Margins and Allows Us to Realize Operating Synergies.    Our size facilitates our clustering strategy, which allows us to realize operating efficiencies. We believe we achieve higher operating profit margins than our publications could achieve on a stand-alone basis by leveraging our operations and by 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, operating profit margins, low capital expenditures 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 media businesses 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 1998 and through December 31, 2006, we have invested over $684.0 million to acquire 278 publications in 42 transactions that contributed an aggregate of 73.2% of our total revenue in 2006. In addition, from January 1, 2007 through May 7, 2007, we have invested $1.0 billion to acquire an additional 65 publications. Our SureWest Acquisition has expanded our portfolio to include four yellow page directories in and around the Sacramento, California area. By implementing revenue generating initiatives and leveraging the economies of scale inherent in our clustering strategy, we increased trailing 12-month Adjusted EBITDA at those publications from $59.1 million at the time of acquisition to $67.0 million in 2006.

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 plan to grow our revenue and cash flow per share through a combination of (i) organic growth in our existing portfolio, (ii) disciplined acquisitions of additional assets and operating companies within the highly fragmented local media industry and (iii) the realization of economies of scale and operating efficiencies. 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.

Pursue a Disciplined and Accretive Acquisition Strategy in Existing and New Markets. The local media industry is highly fragmented and we believe we have a strong platform for creating additional shareholder value. We evaluate acquisitions on an ongoing basis and intend to pursue acquisitions of locally focused media businesses, including directories (where we have made a recent acquisition), traders, direct mail and web site operators, 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, or provide a platform for entry into new markets or locally focused media products. From time to time, we are in discussions with potential acquisition candidates and, although we are not party to any definitive agreements relating to any material acquisitions, individually or in the aggregate, we are currently participating in competitive sales processes for several companies that meet our acquisition criteria, some of which could be significant. There can be no assurance that we will succeed in acquiring any of these companies.

Leverage Benefits of Scale and Clustering to Increase Cash Flows and Operating Profit Margins. We intend to 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 increase our cash flows and expand our operating 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. We believe that our established positions in local markets, combined with our publishing and distribution capabilities, allow us to develop and customize new products to address the evolving interests and needs of our readers and 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 (where we have made a recent acquisition), 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 believe that we are well-positioned to increase our online penetration and generate additional online revenues due to our ability to deliver unique local content and our relationships with readers and advertisers. We believe this presents an opportunity to increase our overall audience penetration rates and advertising market share in each of the communities we serve. We expect that 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 online display 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.

 

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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 gather relevant demographic information, present to customers, effectively utilize time and close on sales calls. Our training includes sharing “best practices” of our most successful account representatives. Finally, for managers, we have created 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. Key characteristics of each of these types of publications are summarized in the table below. In addition through our recent SureWest Acquisition, completed in the first quarter of 2007, we have also increased the number of online and print telephone directories in our product mix.

 

     

Daily Newspapers

  

Weekly Newspapers

  

Shoppers

  

Niche Publications

Cost:

  

Paid

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

Paid: Revenue from advertising, 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

Internet Availability:    Available online    Major publications available online    Major publications available online    Selectively available online

A list of our dailies, weeklies, shoppers and directories in each of our geographic regions is attached as Annex A to this prospectus. We also operate over 245 related websites. A list of such websites is attached as Annex B to this prospectus.

 

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Overview of Operations

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

The following tables sets forth information regarding our publications.

 

     Number of Publications    Circulation(1)

Operating Region

   Dailies    Weeklies    Shoppers    Paid    Free    Total Circulation

Northeast

   8    113    12    389,000    897,000    1,286,000

Western

   19    68    32    267,000    460,000    727,000

Northern Midwest

   18    15    27    107,000    463,000    570,000

Southern Midwest

   19    24    25    76,000    379,000    455,000

Atlantic

   12    22    27    170,000    429,000    599,000
                             

Total

   76    242    123    1,009,000    2,628,000    3,637,000

(1) Circulation statistics are estimated by our management as of March 31, 2007, except that audited circulation statistics, to the extent available, are utilized as of the audit date.

Northeast Region. We are one of the largest community newspaper publishers in New England by number of daily publications, serving 160 communities in markets across eastern Massachusetts. All of our current Northeast publications are located in the Boston Designated Market Area (“DMA”), including eight daily and 113 weekly newspapers, 12 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 52,638), the Enterprise (founded in 1880 with circulation of 31,351) and the MetroWest Daily News (founded in 1897 with circulation of 22,705).

Many of the towns within our Northeast region were founded in the 1600s and our daily and weekly newspapers in the region have long been institutions within these communities. In fact, our Northeast region has 34 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.

Massachusetts boasts nearly one million households in the region earning greater than $75,000, and a 62% homeownership rate. This upscale demographic provides a desirable market for advertisers. According to Scarborough Research, daily newspaper readership in the top 10 DMA’s reaches 70% of the market in a 5-day cumulative audience. We reach 1.7 million readers in the Eastern Massachusetts market.

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 $121 billion in 2006, 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

   8    113    12    5

In the second quarter of 2007 through May 7, 2007, we acquired an additional two daily and one weekly newspaper, as well as four shopper publications in the Northeast region, with an aggregate circulation of approximately 182,000. Also during the second quarter of 2007 through May 7, 2007, we acquired two additional production facilities.

Western Region. Our Western region encompasses Illinois, parts of Minnesota, California, Colorado, Arizona and Wisconsin and a total of 19 daily and 68 weekly newspapers and 32 shoppers. In addition to a geographic mix, we benefit from a diverse economic and employment base across the region.

We are the largest newspaper publishing company in Illinois by number of daily publications, with 15 daily and 48 weekly newspapers and 21 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 84 publications is published at one of the nine press plants we operate across the state.

The southern Illinois cluster is anchored by the 22,813 paid circulation weekly SI Trader, and eight daily newspapers serving contiguous communities with a combined 21,719 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, six weeklies and seven shoppers. This region is characterized by its colleges and universities such as Knox College, Bradley University, Monmouth College 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 24 weekly newspapers and 1 shopper publication 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, McDonalds 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. This acquisition enables us to control delivery in this cluster to cost-effectively launch new products.

 

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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 a majority of these publications has been consolidated to one print plant in Montevideo, 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

   15    48    21    9

Southern Minnesota

   0    7    4    1

California

   2    5    5    3

Colorado

   2    5    1    1

Arizona

   0    2    1    1

Wisconsin

   0    1    0    0
                   

Total

   19    68    32    15

In the second quarter of 2007 through May 7, 2007 we acquired an additional five daily and two weekly newspapers as well as five shopper publications in the Western region with an aggregate circulation of approximately 386,000. Also, during the second quarter of 2007 through May 7, 2007, we acquired five additional production facilities.

Northern Midwest Region. Our Northern Midwest region comprises 18 daily and 15 weekly newspapers and 27 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

 

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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.