exhibit991.htm

We have audited the accompanying balance sheets of the (Huntington) Herald-Dispatch (the Company) as of December 31, 2006 and December 25, 2005, and the related statements of income, cash flows, and parent equity for each of the three fiscal years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the (Huntington) Herald-Dispatch at December 31, 2006 and December 25, 2005, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.



	December 31, 2006			December 25, 2005
ASSETS
*Current assets*
Cash and cash equivalents	$	200		$	163
Trade receivables, less allowance (2006 - $82; 2005 - $82)		2,649			2,988
Inventories		748			662
Prepaid expenses		33			67
*Total current assets*		3,630			3,880

*Property, plant and equipment*
Land		379			379
Buildings and improvements		2,575			2,551
Machinery, equipment and fixtures		8,526			8,258
Construction in progress		19			5
*Total*		11,499			11,193
Less accumulated depreciation		(7,981	)		(7,775	)
*Net property, plant and equipment*		3,518			3,418

*Intangible and other assets*
Goodwill		2,438			2,438
Other Assets		1			1
*Total intangible and other assets*		2,439			2,439
*Total assets*	$	9,587		$	9,737

LIABILITIES AND PARENT EQUITY
*Current liabilities*
Accounts payable	$	636		$	737
Compensation and other accruals		355			346
Deferred income		504			625
*Total current liabilities*		1,495			1,708

Deferred income taxes		531			505
*Total liabilities*		2,026			2,213
*Total Parent equity*		7,561			7,524
*Total liabilities and Parent equity*	$	9,587		$	9,737

	Fiscal Year Ended
	December 31, 2006		December 25, 2005		December 26, 2004

*Net Operating Revenues*
Newspaper advertising	$	15,650	$	15,950	$	16,231
Newspaper circulation		4,336		4,361		4,768
Commercial printing and other		3,561		4,164		3,475
*Total*		23,547		24,475		24,474

*Operating Expenses*
Operating costs, exclusive of depreciation		13,702		13,824		13,117
Selling, general and administrative expenses,
exclusive of depreciation		3,799		3,719		3,601
Depreciation		567		589		612
*Total*		18,068		18,132		17,330
*Income before income taxes*		5,479		6,343		7,144
Provision for income taxes		2,197		2,544		2,865
*Net income*	$	3,282	$	3,799	$	4,279

	Fiscal Year Ended
	December 31, 2006			December 25, 2005			December 26, 2004

*Cash flows from operating activities:*
Net Income	$	3,282		$	3,799		$	4,279
Adjustments to reconcile net income to net cash
flow from operations:
Depreciation		567			589			612
Trade receivables		339			(142	)		(336	)
Inventories		(86	)		114			(271	)
Prepaid expenses		34			(25	)		(12	)
Accounts payable		(101	)		(222	)		206
Compensation and other accruals		9			(25	)		57
Deferred income		(121	)		40			63
Deferred income taxes		26			(95	)		(40	)
*Net cash flow from operating activities*		3,949			4,033			4,558

*Cash flows used in investing activities:*
Purchase of property, plant and equipment		(667	)		(686	)		(554	)
Disposals of property, plant and equipment		-			22			-
*Net cash used in investing activities*		(667	)		(664	)		(554	)

*Cash flows used in financing activities*
Distributions to Parent		(3,245	)		(3,378	)		(3,919	)
*Net cash used in financing activities*		(3,245	)		(3,378	)		(3,919	)

*Net increase (decrease) in cash and cash equivalents*		37			(9	)		85
Balance of cash and cash equivalents at
beginning of period		163			172			87
*Balance of cash and cash equivalents at end of period*	$	200		$	163		$	172


*Balance as of December 28, 2003*	$	6,743
Net income, 2004		4,279
Distributions to Parent		(3,919	)
*Balance as of December 26, 2004*	$	7,103
Net income, 2005		3,799
Distributions to Parent		(3,378	)
*Balance as of December 25, 2005*	$	7,524
Net income, 2006		3,282
Distributions to Parent		(3,245	)
*Balance as of December 31, 2006*	$	7,561

These financial statements reflect the financial position, results of operation and cash flows of the (Huntington) Herald–Dispatch (the Company). For all years presented, the Company was a subsidiary of Gannett Co., Inc. (the Parent), a leading international news and information company. The financial statements are presented as if the Company existed as a separate entity from the remaining businesses of the Parent during the years presented.

Use of estimates: The Company prepares its financial statements in accordance with generally accepted accounting principles which require the use of estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent matters. The Company bases its estimates on historical experience, and other assumptions, as appropriate. The Company re-evaluates its estimates on an ongoing basis. Actual results could differ from these estimates.

Cash and cash equivalents: Cash and cash equivalents consist of highly liquid investments purchased with an original maturity of three months or less. The Company participates in the centralized cash management system of the Parent, wherein cash receipts are transferred to and cash disbursements are funded by the Parent on a daily basis. The net funding to or from the Parent is presented as a cash flow from financing activities in the accompanying statements of cash flows. The amount of cash and cash equivalents and deposit accounts reported separately by the Company primarily represent deposits made after the daily sweep of cash to the Parent or accounts which are not part of the cash management system.

Trade receivables and allowances for doubtful accounts: Trade receivables are recorded at invoiced amounts and generally do not bear interest. The allowance for doubtful accounts reflects the Company’s estimate of credit exposure, determined principally on the basis of its collection experience.

Property and depreciation: Property, plant and equipment is recorded at cost, and depreciation is provided generally on a straight-line basis over the estimated useful lives of the assets. The principal estimated useful lives are: buildings and improvements, 10 to 40 years; and machinery, equipment and fixtures, four to 30 years. Major renewals and improvements and interest incurred during the construction period of major additions are capitalized. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred.

Goodwill: Goodwill represents the excess of acquisition cost of the Company over the fair value of other assets acquired net of liabilities assumed at the time the Company was purchased by the Parent. The Company follows Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 prohibits the amortization of goodwill and other intangibles with indefinite useful lives unless the intangible asset is deemed to be impaired. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level at least annually. The Company annually performs an impairment test of its goodwill and has determined that no impairment of goodwill existed at December 31, 2006, December 25, 2005 and December 26, 2004.

Valuation of long-lived assets: In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, the Company evaluates the carrying value of long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of a long-lived asset group is considered impaired when the projected undiscounted future cash flows are less than its carrying value. The Company measures impairment based on the amount by which the carrying value exceeds the fair market value. Fair market value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

Revenue recognition: The Company’s revenues include amounts charged to customers for space purchased in the Company’s newspapers, ads placed on its Web sites, and amounts charged to customers for commercial printing jobs. Newspaper revenues also include circulation revenues for newspapers purchased by readers or distributors reduced by the amount of discounts taken. Advertising revenues are recognized, net of agency commissions, in the period when advertising is printed or placed on Web sites. Commercial printing revenues are recognized when the job is delivered to the customer. Certain commercial printing services were provided by the Company to Gannett and represented approximately $2.9 million, $3.4 million and $2.1 million during 2006, 2005, and 2004, respectively. Circulation revenues are recognized when purchased newspapers are distributed. Amounts received from customers in advance of revenue recognition are deferred as liabilities.

Prior to December 26, 2005, the Company accounted for stock-based compensation using the intrinsic value-based method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). Under APB No. 25, the Company generally did not recognize stock-based compensation for stock options in its statements of income, because the options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. As permitted, the Company elected to adopt the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Under those provisions, the Company disclosed in the notes to its financial statements what the effect would have been on its results of operations and related per share amounts had compensation costs for the Parent’s stock options been recorded based on the fair value at grant date.

Effective December 26, 2005, the first day of its 2006 fiscal year, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payments (SFAS No. 123(R)), using the modified prospective transition method. Under this transition method, stock-based compensation costs recognized in the income statement for 2006 include (a) compensation expense for all unvested stock-based awards that were granted through December 25, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (b) compensation expense for all share-based payments granted after December 25, 2005, based on grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company’s stock option awards have graded vesting terms and the Company recognizes compensation expense for these options on a straight-line basis over the requisite service period for the entire award (generally four years). Restricted shares are accounted for similarly under both SFAS No. 123(R) and APB 25.

Allocations: The following allocation policies have been established by management of the Company. Unless otherwise noted, these policies have been consistently applied in the historical financial statements of the Company. In the opinion of management, the methods for allocating these costs are reasonable. It is not practicable to estimate the costs that would have been incurred by the Company if they had been operated on a stand-alone basis.

Specifically identifiable operating expenses - Costs which relate entirely to the operations of the Company are attributed entirely to them. These expenses consist of costs of personnel who are 100% dedicated to operations, and amounts paid to third parties for services rendered.

Shared operating expenses - The Parent allocates the cost of certain corporate general and administrative services and shared services, including shared personnel, to each location based on a variety of allocation methods. These shared services include newspaper executive management, legal, accounting, telecommunications, human resources, pension, medical, disability and insurance amounts. These costs have been allocated to the Company based on one of the following allocation methods: (1) pro rata portion of payroll (2) pro rata portion based on management’s assessment of usage of services, or (3) as a percent of revenue. Management determined which allocation method was appropriate based on the nature of the shared service being provided. See Note 9 for additional discussion on related party transactions.

In thousands of dollars	Fiscal Year
	2006		2005		2004
Corporate expenses	$	471	$	490	$	489
Pension expense		288		274		261
Other postretirement benefits		563		688		666
Contributions to 401(k) savings plan		85		84		81
Insurance expense		1,467		1,540		1,421
Medical disability expense		33		31		29
Non-cash stock compensation		49		1		-
Allocated charges from the Parent	$	2,956	$	3,108	$	2,947

Taxes - The Company’s allocated share of the Parent’s consolidated Federal tax provision is determined using the stand-alone method. Under the stand-alone method, tax expense or benefit is calculated as if the Company filed its own tax returns. State income taxes are allocated in a similar manner. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities carried by the Company, and are measured using the enacted tax rates that are expected to be in effect in the period in which these differences are expected to reverse.

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation Number 48, Accounting for Uncertainty in Income Taxes (FIN No. 48), which will become effective for the Company’s first quarter of 2007. Under FIN No. 48, companies are required to make disclosures about uncertainties in their income tax positions, including a roll-forward analysis of tax benefits taken that do not qualify for financial statement recognition. Under FIN No. 48, the recognition of a tax benefit would only occur when it is “more-likely-than-not” that the position would be sustained upon examination. Management adopted this standard in the first quarter of 2007. The standard did not have a material impact on its financial accounting and reporting.

In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value, creates a framework for measuring fair value, and expands disclosure requirements about such fair value measurements. SFAS No. 157 will become effective for the Company’s first quarter of 2008. Management is in the process of studying the impact of this standard on the Company’s financial accounting and reporting.

In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). This statement will become effective for the Company at the beginning of fiscal year 2008. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. Additionally, SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. Management is currently evaluating this standard and the impact on its financial accounting and reporting.

In thousands of dollars	Fiscal Year
	2006		2005			2004
Current:
Federal	$	1,889	$	2,296		$	2,527
State		282		343			378
		2,171		2,639			2,905
Deferred:
Federal		23		(83	)		(35	)
State		3		(12	)		(5	)
		26		(95	)		(40	)
Provision for income taxes	$	2,197	$	2,544		$	2,865


Fiscal Year	2006			2005			2004
U.S. statutory tax rate		35.0	%		35.0	%		35.0	%
Increase in taxes resulting from:
State/other income taxes net of federal
income tax benefit		5.0			5.0			5.0
Other, net		0.1			0.1			0.1
*Effective tax rate*		40.1	%		40.1	%		40.1	%

Prior to December 26, 2005, the Company accounted for stock-based compensation using the intrinsic value-based method in accordance with APB No. 25. Under APB No. 25, the Company generally did not recognize stock-based compensation for stock options in its statements of income prior to December 26, 2005 because the options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. As permitted, the Company elected to adopt the disclosure-only provisions of SFAS No. 123. Under those provisions, the Company is required to disclose in the notes to its financial statements what the effect would have been on its results of operations had compensation costs for the stock options been determined based on the fair value at grant date. Such amounts for 2005 totaled $330,000 of pre-tax stock-based compensation or $200,000 on an after-tax basis, and for 2004 totaled $510,000 of pre-tax stock-based compensation or $310,000 on an after-tax basis.

Effective December 26, 2005, the first day of its 2006 fiscal year, the Company adopted the fair value recognition provisions of SFAS No. 123(R), using the modified prospective transition method. Under this transition method, stock-based compensation costs recognized in the income statement for 2006, include (a) compensation expense for all unvested stock-based awards that were granted prior to December 25, 2005 based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (b) compensation expense for all share-based payments granted on or after December 25, 2005 based on grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The impact of adoption of SFAS No. 123(R) was to reduce 2006 pre-tax operating results by $35,000 ($21,000 after-tax). Results for prior periods have not been restated. The Parent’s stock option awards have graded vesting terms and the Company recognizes compensation expense for these options on a straight-line basis over the requisite service period for the entire award (generally four years).

Valuation and amortization method– The Parent determines the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Expected term– The expected term represents the period that the Parent’s stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.

For 2006, the Company recorded stock-based compensation expense of $49,000, comprising $35,000 for nonqualified stock options and $14,000 for restricted shares. The related tax benefit for stock compensation was $20,000. On an after tax basis, total non-cash compensation expense was $29,000.

The following table illustrates the impact of adopting the fair value recognition provisions of SFAS No. 123(R) on income from operations, income before income taxes and net income for 2006. The tables reflect the impact of expensing stock options only. Restricted shares are accounted for similarly under both SFAS No. 123(R) and APB 25.

Options outstanding to employees of the Company as of December 31, 2006, December 25, 2005 and December 26, 2004 were 52,938, 55,038 and 56,239, respectively. The weighted average exercise price was $75.81, $75.23 and $74.94 as of December 31, 2006, December 25, 2005 and December 26, 2004, respectively.

The Company is part of the Gannett Retirement Plan which is the Parent’s principal retirement plan and covers most U.S. employees. The Company recognized expense of $288,000, $274,000 and $261,000, respectively, related to its retirement plans during the fiscal years 2006, 2005 and 2004. This expense reflects an allocation from the Parent.

The Parent provides health care and life insurance benefits to certain retired employees who meet age and service requirements. Most retirees contribute to the cost of these benefits and retiree contributions are increased as actual benefit costs increase. The Parent’s policy is to fund benefits as claims and premiums are paid. The Company recognized postretirement benefit costs for health care of $563,000, $688,000 and $666,000 respectively, for the fiscal years 2006, 2005 and 2004. This expense reflects an allocation from the Parent.

Certain corporate overhead expenses incurred by the Parent have been allocated to the Company and are reflected in the statements of income. These overhead costs relate to general management oversight, financial management, including public-company reporting, consolidated tax filings, the Parent benefit plan administration, risk management and consolidated treasury services and costs to support the Parent information technology infrastructure. The Parent also allocates a portion of its annual audit and tax return review costs provided by an independent public accounting firm to the Company. These costs are allocated to the Company based on one of the following allocation methods: (1) pro rata portion of payroll, or (2) pro rata portion based on management’s assessment of usage of services, or (3) as a percent of revenue. Management believes the basis for the allocations is reasonable. The amounts allocated to the Company in fiscal years 2006, 2005 and 2004 were approximately $471,000, $490,000 and $489,000, respectively.

The Parent allocated to its divisions or subsidiaries costs associated with the retirement plan that the Parent administers. The Company was allocated approximately $288,000, $274,000, and $261,000 in fiscal years 2006, 2005 and 2004 respectively, by the Parent related to this retirement plan. The Company is allocated pension expense for coverage based on its pro-rata portion of the Parent’s total payroll to the total cost of the Parent. Had this retirement plan been administered by the Company as a separate entity, the amounts may have been different than those allocated to the Company by the Parent.

The Parent administers a 401(k) savings plan for which all employees (other than those covered by a collective bargaining agreement) who are scheduled to work a minimum number of hours in a year are eligible. The Company matches 50% of the first 6% of employee contributions. The Company recognized expense related to the Company match of approximately $85,000, $84,000 and $81,000 in fiscal years 2006, 2005 and 2004, respectively.

The Parent allocates to its divisions or subsidiaries costs associated with certain insurance programs that the Parent administers. The insurance programs for which the related costs are allocated primarily include medical, automobile liability, workers’ compensation, general liability, property and libel insurance. The Company was allocated approximately $1,467,000, $1,540,000 and $1,421,000 in fiscal years 2006, 2005 and 2004, respectively, by the Parent related to these insurance programs. These amounts are allocated by the Parent using various methodologies, as described below. Had these insurance programs been administered by the Company as a separate entity, the amounts may have been different than those allocated to the Company by the Parent.

Included within the insurance cost allocation are claims allocations related to medical and non-property casualty programs (automobile liability, workers’ compensation and general liability) for which the Parent is self-insured up to a certain amount. For the self–insured component, costs are allocated to the Company based on incurred claims of the Company. The Parent has premium based policies which cover amounts in excess of the self-insured retentions. The Company is allocated expenses based on its pro-rata portion of the Parent’s total underlying exposure items (i.e., number and type of vehicles, sales, payroll dollars, etc.) to the total insurance cost to be incurred by the Parent.

The Parent allocated to its divisions or subsidiaries costs associated with medical disability programs that the Parent administers. The Company was allocated approximately $33,000, $31,000 and $29,000 in fiscal years 2006, 2005 and 2004, respectively, by the Parent related to these medical disability programs. These amounts were allocated by the Parent using the Company’s pro-rata portion of payroll to the total disability expense. Had these medical disability programs been administered by the Company as a separate entity, the amounts may have been different than those allocated to the Company by the Parent.

Non-cash stock compensation includes compensation expenses associated with the Parent restricted common stock and stock options issued under the Gannett Co. Inc., Omnibus Incentive Compensation plan. The Company was allocated approximately $49,000 and $1,000 in fiscal years 2006 and 2005, respectively, by the Parent related to non-cash stock compensation expense. See Note 6 for further discussion of stock awards.

On May 7, 2007, GateHouse Media, Inc. completed the purchase of the Company and three other newspapers owned by Gannett Co., Inc. for approximately $410 million. The purchase price is subject to adjustment based upon a final determination of the amount of net working capital as of the date of acquisition.

		Fiscal Year
		2004
Average expected term		7 yrs.
Expected volatility		13.62-19.16%
Weighted average volatility		13.95%
Risk-free interest rates		3.71-3.83%
Expected dividend yield		1.24-1.33%
Weighted average expected dividend		1.25%

In thousands of dollars
2007	$	50
2008		-
2009		-
2010		-
2011		-
Later years		-
*Total*	$	50

(amounts in thousands)	As Reported Under SFAS No. 123(R)		Impact of Stock-option Compensation Expense		Accounted for Under APB 25

Income before income taxes	$	5,479	$	35	$	5,514
Net income	$	3,282	$	21	$	3,303