The back and forth began with a Dec. 13, 2007, letter from Linda Cvrekl, branch chief, SEC Division of Corporate Finance, to Michael Reed, GateHouse Media CEO, expressing problems with the company's 10K filing for the fiscal year ending Dec. 31, 2006. The response to that letter, dated Jan. 4, 2008, was written by Polly Grunfeld Sack, GateHouse vice president, secretary, and general counsel.
A Feb. 8 letter from Ms. Cyrekl indicates the SEC was not satisfied with the response:
We note that your common share price and your overall market capitalization have significantly declined during the interim periods since the completion of your fiscal year ended December 31, 2006. We also note that your total market capitalization of approximately $500 million at December 31, 2007 is significantly below your book value at September 30, 2007 and your book value at this date include a significant amount of goodwill and other intangible assets, which aggregated approximately $1.7 billion at September 30, 2007. This decline in your market capitalization may be indicative of a potential impairment of the Company’s recorded investment in its intangible assets and goodwill.
The letter asked for more information and reminded GateHouse officials that all correspondence was also available to the SEC's Enforcement Division.
Finally, in March 14 letter from Ms. Sack to the SEC, GateHouse attempted to fully explain the problems with its reports:
Below are certain of the facts and circumstances which management believes are responsible for the disparity between our market capitalization and the book value of our equity in the fourth quarter of 2007.
While our assets continue to perform and generate cash flows within an expected range, we believe a significant portion of the decline in our equity value relates to several factors including: (1) market wide recessionary fears which has a direct negative impact on advertising based businesses such as ours, (2) continued pressure on the metro oriented newspaper companies that has caused investors to take a negative view of our broad industry, despite the fact that we believe we are not directly comparable to our metro oriented peers, (3) the perception by investors that the capital markets are closed to us and that we will not have access to capital thereby potentially affecting our ability to grow, and (4) lackluster performance of non newspaper companies such as yellow pages directories, radio and outdoor advertising companies who also derive their revenue from local advertisers.
In addition to macro trends affecting the advertising industry, several of our investors were heavily weighted in yield stocks and funds. As a result of turmoil in the credit markets in the latter half of 2007, they had redemptions in their funds. These investors found themselves in the position of holding mortgage related assets in addition to our and other yield stocks. They had to resort to selling our stock since many of their other holdings did not have a ready market to convert the investments to cash. This has put a great deal of negative volume and price pressure on the stock unrelated to the Company fundamentals. Moreover, the public float of the Company’s stock is only about 40% of total shares outstanding, with 60% of the stock owned by our 4 largest shareholders. The small size of our float results in considerable illiquidity as investors try to sell, thereby exacerbating negative pressure on our stock.
The Company’s largest investor, Fortress Investment Group, LLC, and its affiliates (“Fortress”) controlled approximately 58% and 42% of the Company’s stock at June 29, 2007 and December 31, 2007, respectively. SFAS No. 142 indicates that a control premium, the additional amount an acquiring entity is willing to pay for a controlling interest versus the amount an investor would be willing to pay for a non-controlling interest, may cause the fair value of a reporting unit to exceed its market capitalization.
We believe this has two impacts on our share price. First, there is a significant control discount placed upon the market price of our stock and second, sellers in the market are more easily able to negatively affect the price of our stock, due to such a large percentage of shares not being actively traded and the relative illiquidity of our securities.
We believe that our publicly traded peers are not ideal comparables, even though investors have tended to group GateHouse with the general newspaper sector. Our local community newspaper market focus has reduced or deflected the impact on our revenues and operating results of trends that much of the newspaper industry is experiencing. There is a distinct difference between those entities that operate newspapers in major metro markets, as is the case with the preponderance of public companies within our industry, versus our business, which operates primarily in local community markets and focuses on local news.
Major markets generally have greater competition from other newspapers and other forms of existing and evolving media due to their population density and higher exposure to national advertisers who are able to choose from multiple media outlets that are competing for their business. We believe this has significantly impacted current stock prices within our industry and we, as a newspaper company, have had these circumstances and trends being experienced by major metropolitan newspapers unduly attributed to our locally focused operations.
That did not satisfy the SEC, which asked for more information in a letter dated April 18.
The final letter sent by the SEC, dated June 17, indicates GateHouse's letters and amendments the company made to most of its SEC filings had taken care of the problem.