**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

_________________________

**FORM 10-K**

** **

| x          | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |
|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | **For the year ended December 31, 2005**                                                           |
| ** ** | **OR**                                                                                                  |
| o          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**For the transition period from                 to                 **

**Commissionfile number: 333-97721**

**VERTIS,INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     |   | **13-3768322**                    |
|------------------------------------------------------------------|--------|-----------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification) |
| **250 West Pratt Street, Baltimore, MD**                         |   | **21201**                         |
| (Address of  principal executive offices)                        |   | (Zip Code)                        |

**Registrant’stelephone number, including area code: (410) 528-9800**

**Securitiesregistered pursuant to Section 12 (b) of the Act: None**

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**Securitiesregistered pursuant of Section 12(g) of the Act:  None**

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.Yes o  Nox

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  Nox

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes o  Nox

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act:

| Large accelerate filer o |   | Accelerate  filer o |   | Non-accelerated  filer x |
|--------------------------|--------|---------------------|--------|--------------------------|

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).Yes o  Nox

The number of sharesoutstanding of Registrant’s common stock as of March 27, 2006 was 1,000shares.

**DocumentsIncorporated By Reference:   None**

 

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**VERTIS, INC.**

**ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2005**

**TABLE OF CONTENTS**

| Form 10-K  Item No.                                        | ** ** | ** **                                                                                  | ** ** | ** **    | **Name of Item** | ** ** | ** ** | **Page** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------|------------------|------------|------------|----------|
| **Part I**                                                 |       |                                                                                        |       |          |
| Item 1                                                          |       | Business                                                                                    |       |   3 |
| Item  1A                                                        |       | Risk  Factors                                                                               |       |   8 |
| Item 1B                                                         |       | Unresolved Staff  Comments                                                                  |       | 11            |
| Item  2                                                         |       | Properties                                                                                  |       | 12            |
| Item  3                                                         |       | Legal  Proceedings                                                                          |       | 13            |
| Item 4                                                          |       | Submission of  Matters to Vote of Security Holders                                          |       | 13            |
| **Part II**                                                |       |                                                                                        |       |          |
| Item 5                                                          |       | Market for  Registrant’s Common Equity and Related Stockholder Matters                 |       | 14            |
| Item 6                                                          |       | Selected Financial  Data                                                                    |       | 14            |
| Item 7                                                          |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 17            |
| Item 7A                                                         |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 34            |
| Item 8                                                          |       | Financial  Statements and Supplementary Data                                                |       | 34            |
| Item 9                                                          |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure       |       | 35            |
| Item 9A                                                         |       | Controls and  Procedures                                                                    |       | 35            |
| Item  9B                                                        |       | Other  Information                                                                          |       | 35            |
| **Part III**                                               |       |                                                                                        |       |          |
| Item 10                                                         |       | Directors and  Executive Officers of Vertis, Inc.                                           |       | 36            |
| Item 11                                                         |       | Executive  Compensation                                                                     |       | 39            |
| Item 12                                                         |       | Security  Ownership of Certain Beneficial Owners and Management                             |       | 45            |
| Item 13                                                         |       | Certain  Relationships and Related Transactions                                             |       | 48            |
| Item 14                                                         |       | Principal  Accountant Fees and Services                                                     |       | 49            |
| **Part IV**                                                |       |                                                                                        |       |          |
| Item 15                                                         |       | Exhibits and  Financial Statement Schedules                                                 |       | 51            |
| Index to  Financial Statements and Financial Statement Schedule |       | F-1                                                                                         |
| Signatures                                                      |       | F-38                                                                                        |

 

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**CAUTIONARY STATEMENTS**

We have included inthis Annual Report on Form 10-K, and from time to time ourmanagement may make, statements which may constitute “forward-lookingstatements” within the meaning of the safe harbor provisions of The PrivateSecurities Litigation Reform Act of 1995. Youmay find discussions containing such forward-looking statements in “Business”and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” as well as within this Annual Report generally. In addition, whenused in this Annual Report, the words “believes,” “anticipates,” “expects,” “estimates,”“plans,” “projects,” “intends” and similar expressions are intended to identifyforward-looking statements. These forward-looking statementsinclude statements other than historical information or statements of currentcondition, but instead represent only our belief regarding future events, manyof which, by their nature, are inherently uncertain and outside of our control.It is possible that our actual results may differ, possibly materially, fromthe anticipated results indicated in these forward-looking statements. Importantfactors that could cause actual results to differ from those in our specificforward-looking statements include, but are not limited to, those discussedunder “Certain Factors That May Affect Our Business,” as well as:

·       generaleconomic and business conditions;

·       changesin the advertising, marketing and information services markets;

·       thefinancial condition of our customers;

·       thepossibility of future terrorist activities or the continuation or escalation ofhostilities in the Middle East or elsewhere;

·       ourability to execute key strategies;

·       actionsby our competitors;

·       theeffects of supplier price fluctuations on our operations, includingfluctuations in the price of raw materials we use;

·       downgradesin our credit ratings;

·       changesin interest rates; and

·       othermatters discussed in this Annual Report generally.

Consequently, readers of this Annual Report shouldconsider these forward-looking statements only as our current plans, estimatesand beliefs. We do not undertake and specifically decline any obligation topublicly release the results of any revisions to these forward-lookingstatements that may be made to reflect future events or circumstances after thedate of such statements or to reflect the occurrence of anticipated orunanticipated events. We undertake no obligation to update or revise anyforward-looking statement in this Annual Report to reflect any new events orany change in conditions or circumstances. All of the forward-lookingstatements in this Annual Report are expressly qualified by these cautionarystatements. Even if these plans, estimates or beliefs change because of futureevents or circumstances after the date of these statements, or becauseanticipated or unanticipated events occur, we disclaim any obligation to updatethese forward-looking statements.

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**PART I**

**ITEM 1**                   BUSINESS

**Overview**

Vertis, Inc. is a leading provider of targetedadvertising, media, and marketing solutions that drive consumers to marketersmore effectively. Our comprehensive products and services range from consumerresearch, audience targeting, creative services, and workflow management totargeted advertising inserts, direct mail, interactive marketing, packagingsolutions, and digital one-to-one marketing and fulfillment. We deliver acomprehensive range of solutions that simplify, improve, and maximize theeffectiveness of multiple phases of our customers’ marketing campaigns, frominception of an advertising concept, through design, production, targeteddistribution, and ultimately the measurement of advertising effectiveness. Webelieve that our ability to produce cost-effective and measurable results in arelatively short time-frame is critically important to our clients. Our clientsinclude more than 3,000 grocery stores, drug stores and other retail chains,general merchandise producers and manufacturers, financial and insuranceservice providers, newspapers, and advertising agencies.

We offer an extensive list of solutions across a broadspectrum of media designed to enable our clients to reach target customers withthe most effective message. Customers may employ these services individually oron a combined basis to create an integrated end-to-end targeted marketingsolution. We believe that the breadth of our client base limits our reliance onany individual customer. Our top ten customers in 2005 accounted for 33.7% ofour net sales, and no customer accounted for more than 7.9% of our net sales. Wehave excellent relationships with our customers as evidenced by the averagelength of our relationships with our ten largest customers, which is over 16 years.

Vertis, Inc. is a Delaware Corporationincorporated in 1993. In 2005, Vertis had approximately $1.5 billion of netsales and 6,300 employees in North America. Our principal executive offices arelocated at 250 West Pratt Street, Baltimore, Maryland 21201. Our Internetaddress is *www.vertisinc.com*. Althoughwe are not subject to the information requirements of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), we file annual, quarterly andspecial reports and other information with the Securities and ExchangeCommission, or SEC, pursuant to certain contractual obligations. Our filingsare available to the public at the SEC’s website at *www.sec.gov* andalso at our website, under “investor relations”, at the specified address shownabove. You may read and copy any documents we file with the SEC at its publicreference facility in Washington, D.C. Please call the SEC at 1-800-SEC-0330for further information on the public reference facilities.

In this Annual Report,when we use the terms “Vertis,” “we,” “our,” and the “Company,” we mean Vertis, Inc.,and its consolidated subsidiaries. The words “Vertis Holdings” refer to VertisHoldings, Inc., the parent company of Vertis and its sole stockholder.

**Business Segments**

Following the sale of our Vertis Europe segment in thefourth quarter of 2005, as well as other management changes, we reviewed ourbusiness segmentation. Effective with this Annual Report, we changed ourreportable segmentation to two business segments from the geographicsegmentation used in prior periods.

We operate through two reportable business segmentsbased on the way management views and manages the Company. These businesssegments are Advertising Inserts and Direct Mail.  Advertising Inserts provides a full productline of printed targeted advertising products inserted into newspapers. DirectMail provides personalized direct mail products and various targeted directmarketing services. In addition, we also provide premedia and related servicesas well as media planning and placement services. 

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These services will bereferred to as “Corporate and Other” for discussion within this Annual Report. Also,included in Corporate and Other are corporate costs incurred by the Company.

Financial and otherinformation relating to our business segments for each of 2005, 2004 and 2003can be found in Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”, and Note 21, “Segment Information”, toour consolidated financial statements included in this Annual Report.

***Advertising Inserts***

*General.**  *Advertising Inserts provides thefull array of targeted advertising insert products and services. Our productsand services include:

·                    Targetableadvertising insert programs for retailers and manufacturers

·                    Newspaperproducts (TV magazines, Sunday magazines, color comics and special supplements)

·                    Consumerresearch

·                    Creativeservices including page layout and design

We are a leading provider of advertising inserts andthe largest single producer of newspaper TV listing guides and Sunday comics inthe United States. In 2005, we produced more than 33 billion advertisinginserts. Advertising inserts are typically produced in color on better qualitypaper than the reproductions that appear in run-of-press newspaper advertise­ments.In addition, advertising inserts allow marketers to vary layout, artwork,design, trim size, paper type, color and format. Versions may be targeted bynewspaper zones and by specific customer demographics.

We provide 73 of the top 100 Sunday newspapers inthe United States with circulation-building newspaper products and servicesthrough production of comics, TV listing guides, Sunday supplements and specialsections. In 2005, we produced approximately 1.5 billion Sunday comics,and approximately 750 million TV listing guides.

*Sales and Customers.**  *Advertising Inserts employsapproximately 50 sales representatives devoted to this segment’s specificproducts and services.  Our customersinclude grocery stores, drug stores, other retailers, newspapers, and consumergoods manufacturers. Our advertising insert products are distributed innational newspapers and, depending on their target audience, through variousforms of mail distribution and in store circulation. Advertising Insert’s tenlargest customers accounted for approximately 47.9% of the segment’s 2005 netsales. We have established and maintained long-standing customer relationshipswith our major customers.

***Direct Mail***

*General.**  *Direct Mail provides the full arrayof targeted direct marketing products and services. Our products and servicesinclude:

·                    Highlycustomized one-to-one marketing programs

·                    Automateddigital fulfillment services

·                    Directmail production with varying levels of personalization

·                    Datadesign, collection and management to identify target audiences

·                    Mailingmanagement services

·                    Effectivenessmeasurement

·                    Responsemanagement, warehousing and fulfillment services

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We are one of the largest providers of highlycustomized direct mail, one-to-one marketing programs, mailing managementservices, automated digital fulfillment and specialty advertising products inthe United States. We derive the majority of our revenues from the design,production, and execution of personalized advertising mailings rather thantraditional, broadbase direct mailings. Personalized direct mail enablesconsumer goods and other marketers to communicate with their customers on anindividual-by-individual basis, an approach that provides higher response ratesthan broad, non-personalized mailings.

We use sophisticated, data-driven techniques to targetprospects and deliver full color, individualized marketing messages. We canprocess and manipulate databases to enable our customers to target direct mailrecipients based on many attributes, ranging from age, gender, and address tospending habits, type of car owned, whether the recipient is a pet owner, andmany others. These highly individualized marketing campaigns are designed toenhance customer response levels and improve client marketing efficienciesthrough on-demand workflow automation. The growth in customer dataavailability, the increasing sophistication of database marketing tools and thegrowing use of the internet for integrated marketing campaigns havesignificantly increased demand for these services.

*Sales and Customers.**  *Direct Mail employs approximately40 sales representatives devoted to this segment’s specific products andservices.   Our customers includeconsumer goods manufacturers, financial institutions, Internet advertisers,not-for-profit organizations, retailers and government agencies.  While a majority of our net sales are madedirectly to clients, we also sell our products and services through agenciesand brokers. Direct Mail’s ten largest customers accounted for approximately37.4% of the segment’s 2005 net sales. We have established and maintainedlong-standing customer relationships with our major customers.

***Corporate and Other***

*General.**  *Corporate and Other consists of abroad range of premedia, media and other technologies to assist clients withtheir advertising campaigns, including:

·                    Digitalcontent management

·                    Graphicdesign and animation

·                    Digitalphotography, compositing and retouching

·                    In-storedisplays, billboards and building wraps

·                    Consultingservices

·                    Newspaperadvertising development

·                    Mediaplanning and placement and software solutions

We are a leading providerof digital media production and content management solutions to retailers,consumer and commercial products companies and advertising agencies. Ourservices and technologies enable clients to more efficiently create, produceand manage traditional print and advertising content. More importantly, theseservices and technologies also enable clients to benefit from the influences ofemerging digital advertising media such as CD-ROM and the Internet. Ourintegrated offering enables advertisers to maintain consistency of appearanceof their products and brand names throughout various media forms. Additionally,included in the Corporate and Other is our Media Planning division designed tosupport our targeted capabilities and marketing efforts. Corporate and Otherhas approximately 50 sales representatives devoted to this segment’sspecific products and services. Additionally, Corporate and Other includescorporate costs incurred by the Company.

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**Raw Materials**

In 2005, we spent approximately $590 million onraw materials. The primary raw materials required in our operations are paperand ink. We also use other raw materials, such as film, chemicals, computersupplies and proofing materials. We believe that there are adequate sources ofsupply for our primary raw materials and that our relationships with oursuppliers yield improved quality, pricing and overall service to our customers;however, there can be no assurance that we will not be adversely affected by atight market for our primary raw materials.

Our results of operations depend to a large extent onthe cost of paper and our ability to pass along to our customers any increasesin these costs and remain competitive when there are decreases. In recentyears, the number of suppliers of paper has declined, and we have formedstronger commercial relationships with selected suppliers, allowing us toachieve more assured sourcing of high quality paper that meets ourspecifications.

We have contracts covering the purchases of ink andpress supplies, (i.e. plates, blankets, solutions, etc.)  These contracts, which range from 1 to 3years in length, include target minimum quantities and prices. All of theseagreements allow for shortfalls of purchase minimums to be made up over thelife of the contract. In addition, each of the agreements allows for thereduction in obligations for a decline in volume experienced by Vertis, and allhave competitive pricing clauses, whereby suppliers’ prices must remaincompetitive in the market or the purchase minimums can be adjusted.

In January 2005, wepurchased Elite Mailing and Fulfillment Services, Inc., a supplier withwhom we previously had an agreement to purchase all of our requirements formailing services (inserting, sorting, tying, bagging and applying postage todirect mail), for $3.4 million.

**Competition**

The principal methods of competition in our businessesare pricing, quality, flexibility, customer targeting capabilities, breadth ofservice, timeliness of delivery, customer service and other value-addedservices. Pricing depends in large part on the price of paper, which is ourmajor raw material (see “Raw Materials” above). Pricing is also influenced byproduct type, shipping costs, operating efficiencies and the ability to controlcosts. We believe that the introduction of new technologies, continued excesscapacity in this industry, consolidation in our customer’s markets, andsoftness in traditional brand advertising spending, combined with the costpressures facing customers resulting from other factors, including the cost ofpaper, have resulted in margin pressures and increased competition in our corebusinesses.

Our major competitors inNorth America include R.R. Donnelley & Sons Company, QuebecorWorld, Inc., and American Color Graphics. In addition, we compete with othermarketing services providers such as Valassis Communications, Inc.,Harte-Hankes, Inc., ADVO, Inc., Acxiom Corporation, Experian, Inc.,Applied Graphics Technologies, Inc., and Schawk, Inc. We also competefor advertising dollars with television, radio and other forms of electronicmedia.

**Trade Names, Trademarks and Patents**

We own certain tradenames, trademarks and patents used in our business. The loss of any such tradename, other than “Vertis”, or any trademark or patent would not have a materialadverse effect on our consolidated financial condition or results ofoperations.

**Governmental Regulations**

Our business is subject toa variety of federal, state and local laws, rules and regulations. Ourproduction facilities are governed by laws and regulations relating toworkplace safety and worker health, primarily the Occupational Safety andHealth Act (“OSHA”) and the regulations promulgated thereunder. 

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Exceptas described herein, we are not aware of any pending legislation that in ourview is likely to affect significantly the operations of our business. Webelieve that our operations comply substantially with all applicablegovernmental rules and regulations.

**Environmental Matters**

Our operations are subject to a number of federal,state, local and foreign environmental laws and regulations including thoseregarding the discharge, emission, storage, treatment, handling and disposal ofhazardous or toxic substances as well as remediation of contaminated soil andgroundwater. While these laws and regulations impose significant capital andoperating costs on our business and there are significant penalties forviolations, these costs currently are not material.

Certain environmental laws hold current owners oroperators of land or businesses liable for their own and for previous owners’or operators’ releases of hazardous or toxic substances. Because of our operations,the long history of industrial operations at some of our facilities, theoperations of predecessor owners or operators of certain of our businesses, andthe use, production and release of hazardous substances at these sites and atsurrounding sites, we may be subject to liability under these environmentallaws. Various facilities of ours have experienced some level of regulatoryscrutiny in the past and are, or may become, subject to further regulatoryinspections, future requests for investigation or liability for past practices.

The Comprehensive Environmental Response, Compensation &Liability Act of 1980 as amended (“CERCLA”), provides for strict, and undercertain circumstances, joint and several liability, for among other things,generators of hazardous substances disposed of at contaminated sites. We havereceived requests for information or notifications of potential liability fromthe Environmental Protection Agency under CERCLA for a few off-site locations. Wehave not incurred any significant costs relating to these matters and we do notbelieve that we will incur material costs in the future in responding toconditions at these sites.

The nature of our operations exposes us to certainrisks of liabilities and claims with respect to environmental matters. Webelieve our operations are currently in material compliance with applicableenvironmental laws and regulations. In many jurisdictions, environmentalrequirements may be expected to become more stringent in the future which couldaffect our ability to obtain or maintain necessary authorizations and approvalsor result in increased environmental compliance costs.

We do not believe thatenvironmental compliance requirements are likely to have a material effect onus. We cannot predict what additional environmental legislation or regulationswill be enacted in the future or how existing or future laws or regulationswill be administered or interpreted, or the amount of future expenditures thatmay be required in order to comply with these laws. There can be no assurancethat future environmental compliance obligations or discovery of new conditionswill not arise in connection with our operations or facilities and that thesewould not have a material adverse effect on our business, financial conditionor results of operations.

**Employees**

As of December 31,2005, we had approximately 6,300 employees. Most of the hourly employees at ourNorth Brunswick and Newark, New Jersey facilities (approximately 176 employees)are represented by the Paper, Allied Industrial, Chemical and Energy WorkersInternational Union. We believe we have satisfactory employee and laborrelations.

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**ITEM 1A**           RISKFACTORS

***Our highly leveraged status may impair our financialcondition and we may incur additional debt***.

We currently have a substantial amount of debt. As of December 31,2005, our total consolidated debt was $1.05 billion, excluding our accountsreceivable securitization facility. Our substantial debt could have importantconsequences for our financial condition, including:

·                    makingit more difficult for us to satisfy our obligations under the outstandingindebtedness;

·                    increasingour vulnerability to general adverse economic and industry conditions;

·                    limitingour ability to obtain additional financing to fund future working capital,capital expenditures, acquisitions and other general corporate requirements;

·                    requiringa substantial portion of our cash flow from operations for the payment ofinterest on our debt and reducing our ability to use our cash flow to fundworking capital, capital expenditures, acquisitions and general corporaterequirements;

·                    limitingour flexibility in planning for, or reacting to, changes in our business andthe industry in which we operate; and

·                    placingus at a competitive disadvantage to other less-leveraged competitors.

The indentures governingour debt instruments, subject to specified limitations, permit us and oursubsidiaries to incur additional debt. In addition, as of December 31,2005, our senior credit facility would permit us to borrow up to an additional$111.6 million.  If new debt is added toour and our subsidiaries’ current debt levels, the related risks that we andthey now face could intensify.

***Servicing our debt will require asignificant amount of cash, and our ability to generate sufficient cash dependsupon many factors, some of which are beyond our control.***

Our ability to makepayments on and refinance our debt and to fund planned capital expendituresdepends on our ability to generate cash flow in the future. To some extent,this is subject to general economic, financial, competitive and other factorsthat are beyond our control. Based on the current and anticipated level ofoperations, we believe that our cash flow from operations, together withamounts available under our senior credit facility, is adequate to meet ouranticipated requirements for working capital, capital expenditures, interestpayments and scheduled principal payments for the next twelve months. We cannotassure you, however, that our business will continue to generate cash flow ator above current levels. If we are unable to generate sufficient cash flow fromoperations in the future to service our debt, we may have to refinance all or aportion of our existing debt or obtain additional financing. We cannot assureyou that any refinancing of this kind would be possible or that any additionalfinancing could be obtained. The inability to obtain additional financing couldmaterially impact our ability to meet our future debt service, capitalexpenditure and working capital requirements.

***Covenant restrictions under our indebtedness may limitour ability to operate our business.***

Our indentures andother debt agreements contain, among other things, covenants that may restrictour ability to finance future operations or capital needs or to engage in otherbusiness activities. The indentures and agreements restrict, among otherthings, our and the subsidiary guarantors’ ability to:

·       borrowmoney;

·       paydividends or make distributions;

·       purchaseor redeem stock;

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·       makeinvestments and extend credit;

·       engagein transactions with affiliates;

·       engagein sale-leaseback transactions;

·       consummatecertain asset sales;

·       effecta consolidation or merger or sell, transfer, lease or otherwise dispose of allor substantially all of our assets; and

·       createliens on our assets.

In addition, our senior credit facility requires us tomaintain a minimum Earnings before Interest, Taxes, Depreciation andAmortization (“EBITDA”) amount, as calculated per the credit agreement. Formore information about the restrictions and requirements under our seniorcredit facility, see Note 11 “Long-Term Debt” to our consolidated financialstatements included in this Annual Report and “Liquidity and Capital Resources”in Item 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations”.

Events beyond our control, including changes ingeneral economic and business conditions, may affect our ability to meet theminimum EBITDA test. We cannot assure you that we will meet this test or thatthe lenders will waive any failure to meet this test. A breach of any of thesecovenants would result in a default under our indentures and debt agreements. Allof our debt instruments have customary cross-default provisions. If an event ofdefault under our debt instruments occurs, the lenders could elect to declareall amounts outstanding thereunder, together with accrued interest, to beimmediately due and payable. In that event, we might not have sufficient assetsto pay amounts due on our outstanding debt.

***The high level of competition inthe advertising and marketing services industry could have a negative impact onour ability to service debt, particularly in a prolonged economic downturn.***

The advertising and marketing services industry ishighly competitive in most product categories and geographic regions. Competitionis largely based on price, quality and servicing the specialized needs ofcustomers. Moreover, rapid changes in information technology may result in moreintense competition, as existing and new entrants seek to take advantage of newproducts, services and technologies that could render our products, servicesand technologies less competitive or, in some instances, even obsolete. See  “Competition” above. Technological advancesin digital transmission of data and advertising creation have resulted in thein-house production of advertising content by certain end-users which has had anegative impact on our profitability. In addition, our industry has experiencedcompetitive pricing pressure due to industry over-capacity which affects themargin on our advertising insert and direct mail products. The competitivepricing pressures have resulted in a decline in our margins. In addition,changes in product and equipment mix can have an impact on margins.

Any future periods ofeconomic downturn could result in continuing increased competition and possiblyaffect our sales and profitability. A decline in sales and profitability maydecrease our cash flow, and make it more difficult for us to service our levelof debt.

***Demand for our services maydecrease due to a decline in clients’ or an industry’s financial condition ordue to an economic downturn.***

We cannot assure you thatthe demand for our services will continue at current levels. Our clients’demands for our services may change based on their needs and financialcondition. In addition, when economic downturns affect particular clients orindustry groups, demand for advertising and marketing services provided tothese clients or industry groups is often adversely affected. For example, asubstantial portion of our revenue is generated from customers in varioussectors of the retail industry. There can be 

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noassurance that economic conditions or the level of demand for our services willimprove or that they will not deteriorate. If there is another period ofeconomic downturn or stagnation, our results of operations may be adverselyaffected.

***Changes in the cost of paper could have a negativeimpact on our ability to service our indebtedness.***

An increase in the cost of paper, a key raw materialin our operations, may reduce our production volume and profits. If (i) weare not able to pass paper cost increases to our customers, or (ii) ourcustomers reduce the size of their print advertising programs, our sales andprofitability could be negatively affected. A decline in volume may decreaseour cash flow, and make it difficult for us to service our level of debt.

Capacity in the paperindustry has remained relatively stable in recent years. Increases ordecreases in demand for paper have led to corresponding pricing changes and, inperiods of high demand, to limitations on the availability of certain grades ofpaper, including grades used by us. A loss of the sources of paper supply or adisruption in those sources’ business or failure by them to meet our productneeds on a timely basis could cause temporary shortages in needed materialswhich could have a negative effect on our net sales and profitability.

***Regulations and government actions on direct marketingmay affect us.***

Federal and state legislatures have passed a varietyof laws in recent years relating to direct marketing and related areas. Thisand similar future legislation, as well as other government actions, couldnegatively affect direct marketing activities by imposing restrictions ontelemarketing and on advertising in certain industries such as tobacco andsweepstakes, increasing the postal rate and tightening privacy regulations. Therefore,they might have a substantial impact on our direct mail services, whichrepresent approximately 21% of our consolidated revenues for the twelve monthsended December 31, 2005, as we and our customers adjust our behaviors inresponse to such legislation and government actions.

***We rely on key managementpersonnel.***

Our success will depend, in part, on the efforts ofour executive officers and other key employees, including Mr. Dean D.Durbin. Mr. Durbin was appointed chief executive officer of the Company inFebruary 2006. Mr. Donald E. Roland, former CEO, remains on theCompany’s board of directors as a non-executive chairman. Mr. Durbin hassignificant years of service in the advertising and marketing industry. Webelieve Mr. Durbin provides us with an in-depth understanding of the needsof our customers and is key to delivering our integrated advertising productsand marketing services. In addition, the market for qualified personnel iscompetitive and our future success will depend upon, among other factors, ourability to attract and retain these key personnel. The loss of the services ofany of our key management personnel or the failure to attract and retainemployees could have a material adverse effect on our results of operations andfinancial condition due to disruptions in leadership and continuity of ourbusiness relationships. The Company believes that Mr. Durbin, with morethan eight years of experience with Vertis and its predecessor company TreasureChest Advertising, as well as more than 30 years of experience in theadvertising and marketing industry, will provide the insight and leadershipnecessary to continue to successfully manage the Company as Mr. Roland’ssuccessor.

***There can be no assurance thatThomas H. Lee Partners L.P and its affiliates (“THL L.P.”), as controllingshareholder, will exercise its control in our best interests as opposed to itsown best interests.***

Because of itsposition as controlling shareholder of Vertis, THL L.P. is able to exercisecontrol over decisions affecting us, including:

·       compositionof our board of directors, and, through it, our direction and policies,including the appointment and removal of officers;

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·       mergersor other business combinations and opportunities involving us;

·       furtherissuance of capital stock or other securities by us;

·       paymentof dividends; and

·       approvalof our business plans and general business development.

There can be no assurance that THL L.P. will exerciseits control in our best interests as opposed to its best interests ascontrolling shareholder.

In addition, THL L.P. ownsdebt securities in Vertis and Vertis Holdings, and may choose to take actionsthat are in its best interests as a debt holder, rather than a shareholder.

**ITEM 1B**          UNRESOLVEDSTAFF COMMENTS

None.

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**ITEM 2**                   PROPERTIES

**Executive Offices**

Ourprincipal executive offices are located at 250 West Pratt Street, Baltimore,Maryland, and comprise approximately 56,000 square feet of leased space,pursuant to a lease agreement expiring on August 31, 2007.

**ProductionFacilities**

As of December 31,2005, we owned 13 and leased****30production facilities, with an aggregate area of approximately 3,400,000 squarefeet. The leased production facilities have lease terms expiring at varioustimes from 2006 to 2016. We believe that our facilities are suitable andadequate for our business. We continually evaluate our facilities to ensurethey are consistent with our operational needs and business strategy. A summaryof production facilities is set forth in the table below:

| **Locations**                   | ** ** | ** ** | ** ** | **Square  Footage**     | ** ** | **Lease Term Expiration** |
|---------------------------------|------------|------------|------------|-------------------------|------------|---------------------------|
| *Advertising Inserts Locations* |       |       |       |                    |
| Atlanta, GA(1)                  |       | 94,700     |       | Fee Ownership           |
| Charlotte, NC.                  |       | 105,400    |       | April 30, 2013     |
| City of Industry, CA            |       | 103,000    |       | September 30, 2006 |
| Columbus, OH                    |       | 141,185    |       | December 31, 2014  |
| Dallas, TX                      |       | 91,649     |       | October 31, 2012   |
| East Longmeadow, MA.            |       | 159,241    |       | February 2, 2016   |
| Elk Grove Village, IL.          |       | 80,665     |       | August 31, 2007    |
| Greenville, MI                  |       | 130,000    |       | Fee Ownership           |
| Lenexa, KS                      |       | 89,403     |       | Fee Ownership           |
| Manassas, VA                    |       | 108,120    |       | May 31, 2014       |
| Niles, MI.                      |       | 90,000     |       | Fee Ownership           |
| Pomona, CA                      |       | 144,542    |       | May 31, 2006       |
| Portland, OR                    |       | 125,250    |       | November 30, 2007  |
| Riverside, CA                   |       | 84,000     |       | Fee Ownership           |
| Sacramento, CA                  |       | 57,483     |       | Fee Ownership           |
| Salt Lake City, UT              |       | 103,600    |       | June 14, 2009      |
| San Antonio, TX.                |       | 67,900     |       | Fee Ownership           |
| San Leandro, CA                 |       | 143,852    |       | November 30, 2014  |
| Saugerties, NY.                 |       | 225,000    |       | Fee Ownership           |
| Tampa, FL.                      |       | 72,418     |       | December 31, 2008  |
| *Direct  Mail Locations*        |       |       |       |                    |
| Bristol, PA.                    |       | 123,000    |       | Fee Ownership           |
| Chalfont, PA                    |       | 320,000    |       | Fee Ownership           |
| Chicago, IL                     |       | 38,302     |       | July 31, 2009      |
| Monroe Township, NJ             |       | 57,987     |       | February 28, 2009  |
| Newark, NJ                      |       | 22,692     |       | December 31, 2007  |
| Newark, NJ                      |       | 23,000     |       | Fee Ownership           |
| North Brunswick, NJ             |       | 173,232    |       | Fee Ownership           |
| Rochester, NY                   |       | 80,000     |       | Fee Ownership           |
| *Other  Locations*              |       |       |       |                    |
| Atlanta, GA.                    |       | 15,588     |       | February 28, 2006  |
| Atlanta, GA.                    |       | 10,607     |       | March 31, 2008     |
| Chicago, IL                     |       | 52,024     |       | May 31, 2011       |
| Clifton Park, NY                |       | 10,680     |       | May 31, 2010       |
| Harrison, NJ                    |       | 21,957     |       | May 31, 2010       |
| Irvine, CA                      |       | 28,000     |       | September 30, 2006 |

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| Irving, TX           |   | 91,649 |   | October 31, 2012   |
|----------------------|--------|--------|--------|-------------------------|
| Long Island City, NY |   | 11,500 |   | August 31, 2006    |
| New York, NY         |   | 6,500  |   | July 31, 2006      |
| New York, NY         |   | 9,000  |   | September 30, 2010 |
| North Haven, CT      |   | 31,600 |   | December 27, 2007  |
| Richmond, VA.        |   | 4,600  |   | March 30, 2009     |
| San Antonio, TX.     |   | 7,927  |   | April 30, 2011     |
| St. Louis, MO        |   | 10,500 |   | September 18, 2006 |
| St. Louis, MO        |   | 30,300 |   | December 31, 2006  |

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(1)           Comprised of two adjacent facilities.

**Sales Offices andOther Facilities**

We maintain a large numberof facilities for use as sales offices and other administrative purposes. Allbut two of the sales offices and other facilities are leased, with lease termsexpiring at various times from 2006 to 2008.

**ITEM 3**                   LEGALPROCEEDINGS

Certain claims, suits andcomplaints (including those involving environmental matters) which arise in theordinary course of our business have been filed or are pending against us. Webelieve, based upon the currently available information, that all the resultsof such proceedings, individually, or in the aggregate would not have amaterial adverse effect on our consolidated financial condition or results ofoperations.

**ITEM 4**                   SUBMISSIONOF VOTE TO SECURITY HOLDERS

There were nomatters submitted to a vote of security holders during the fourth quarter ofour fiscal year ended December 31, 2005.

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**PART II**

**ITEM 5**                   MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Not applicable.

**ITEM 6**                   SELECTEDFINANCIAL DATA

The following table sets forth selected historicalconsolidated financial data for Vertis and its subsidiaries as of and forthe years ended December 31, 2005, 2004, 2003, 2002 and 2001. Thehistorical data for the three-year period ended December 31, 2005 has beenderived from our audited consolidated financial statements included elsewherein this Annual Report. The historical data for the two-year period ended December 31,2002 has been derived from our audited consolidated financial statements notincluded herein. We sold our subsidiaries in Europe (the “European Subsidiaries”)during the fourth quarter of 2005. The table below presents the operatingresults of our European Subsidiaries as discontinued operations for allapplicable periods.

EBITDA is includedin this Annual Report as it is the primary measure we use to evaluate ourperformance. EBITDA, as we used it for this purpose, represents (loss) incomefrom continuing operations before cumulative effect of accounting change, plus:

·       Interestexpense (net of interest income),

·       Incometax expense (benefit), and

·       Depreciationand amortization of intangibles.

We present EBITDA here to provide additionalinformation regarding our performance and because it is the measure by which wegauge the profitability and assess the performance of our segments. EBITDA isnot a measure of financial performance in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”). You should notconsider it an alternative to net income as a measure of operating performanceor to cash flows from operating activities as a measure of liquidity. Ourcalculation of EBITDA may be different from the calculation used by othercompanies and therefore comparability may be limited. A full quantitativereconciliation of EBITDA to its most directly comparable GAAP measure, (loss)income from continuing operations before cumulative effect of accountingchange, is set forth in Note 21 to our consolidated financial statementsincluded elsewhere in this Annual Report.

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You should read thefollowing selected historical consolidated financial data in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe related historical consolidated financial statements and related notesincluded elsewhere in this Annual Report.

| ** **                                                                                                       | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands)**                         | ** ** |
| **Operating data:**                                                                                              |       |                                       |       |   |   |   |   |   |   |   |   |
| Net sales                                                                                                        |       | $ 1,510,288                           |       | $ 1,506,839 |   | $ 1,448,475 |   | $ 1,536,361 |   | $ 1,709,686 |   |
| Operating income                                                                                                 |       | 105,627                                    | (1)        | 113,644 | (2) | 82,139 | (3) | 117,755 | (4) | 64,559 | (5) |
| Interest expense, net(6)                                                                                         |       | 128,821                                    |       | 132,809 |   | 136,557 |   | 134,374 |   | 132,816 |   |
| Loss from continuing  operations before income tax expense (benefit) and cumulative effect of  accounting change |       | (30,847                                    | )          | (66,850 | ) | (48,658 | ) | (19,969 | ) | (82,487 | ) |
| Loss from continuing  operations before cumulative effect of accounting change                                   |       | (22,840                                    | )          | (916 | ) | (97,212 | ) | (17,981 | ) | (58,935 | ) |
| (Loss) gain from  discontinued operations, net(7)                                                                |       | (148,790                                   | )(8)       | (10,217 | ) | 1,287 |   | (15,565 | )(9) | 4,072 |   |
| Cumulative effect of  accounting change, net                                                                     |       | 1,600                                      | (10)       |   |   |   |   | 86,600 | (9) |   |   |
| Net loss                                                                                                         |       | (173,230                                   | )          | (11,133 | ) | (95,925 | ) | (120,146 | ) | (54,863 | ) |
| **Balance sheet data (at year  end):**                                                                           |       | ** **                                 |       |   |   |   |   |   |   |   |   |
| Working capital(11)                                                                                              |       | $ (74,064                             | )          | $ (72,738 | ) | $ (60,857 | ) | $ (19,911 | ) | $ (74,221 | ) |
| Net property, plant and  equipment                                                                               |       | 336,665                                    |       | 359,617 |   | 381,414 |   | 423,520 |   | 471,909 |   |
| Total assets                                                                                                     |       | 872,639                                    |       | 1,049,795 |   | 1,147,498 |   | 1,134,998 |   | 1,337,346 |   |
| Long-term debt (including  current portion)                                                                      |       | 1,049,059                                  |       | 1,024,042 |   | 1,051,917 |   | 1,092,972 |   | 1,161,948 |   |
| Accumulated deficit                                                                                              |       | (926,895                                   | )          | (753,661 | ) | (742,512 | ) | (646,579 | ) | (526,442 | ) |
| Other stockholder’s  equity                                                                                 |       | 401,017                                    |       | 405,101 |   | 400,314 |   | 396,587 |   | 378,625 |   |
| Common stockholder’s  (deficit) equity                                                                      |       | (525,878                                   | )          | (348,560 | ) | (342,198 | ) | (249,992 | ) | (147,817 | ) |
| **Other data:**                                                                                                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                                             |       | $  42,200                        |       | $  45,636 |   | $  40,195 |   | $  39,638 |   | $  66,390 |   |
| Cash flows provided by  operating activities                                                                     |       | 5,693                                      |       | 47,545 |   | 89,046 |   | 96,719 |   | 130,370 |   |
| Cash flows used in  investing activities                                                                         |       | 43,765                                     |       | 18,992 |   | 40,903 |   | 41,412 |   | 67,559 |   |
| Cash flows provided by  (used in) financing activities                                                           |       | 39,332                                     |       | (29,608 | ) | (53,176 | ) | (68,736 | ) | (50,619 | ) |
| EBITDA(12)                                                                                                       |       | 162,705                                    |       | 133,415 |   | 164,161 |   | 196,175 |   | 143,722 |   |
| Dividends to parent                                                                                              |       | 4                                          |       |   |   |   |   |   |   | 7,054 |   |
| Ratio of earnings to  fixed charges                                                                              |       | —                                     | (13)       | — | (13) | — | (13) | — | (13) | — | (13) |

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(1)             Includes $17.1 million of restructuring expenses.

(2)             Includes $4.5 million of restructuring expenses.

(3)             Includes $14.6 million of restructuring expenses.

(4)             Includes $16.6 million of restructuring expenses.

(5)             Includes $41.7 million of restructuring expenses.

(6)             Interest expense, net includes interest expense,amortization of deferred financing fees, interest income and the write-off ofdeferred financing fees.

(7)             In the fourth quarter of 2005, we sold our Europesegment, which is accounted for a discontinued operation in all periods.

(8)             Includes $136.2 million in asset impairment chargeswhich includes $111.2 million resulting from our write-off of the goodwill ofour Europe segment and $25.0 million of Europe long-lived assets written off. Lossfrom discontinued operations also includes $1.6 million loss on sale of theVertis Europe segment based on net proceeds of $2.4 million.

(9)             Effective January 1, 2002, we adopted SFAS 142. Underthis statement, goodwill and intangible assets with indefinite lives are nolonger amortized. Under the transitional provisions of SFAS 142, our goodwillwas tested for impairment as of January 1, 2002. Each of our reportingunits fair value was determined based on a valuation study using the discountedcash flow method and the guideline company method. As a result of ourimpairment test completed in the third quarter of 2002, we recorded animpairment loss of $86.6 million to reduce the carrying value of goodwill toits implied fair value. This amount was reflected as a cumulative effect ofaccounting change. Additionally, a $21.8 million impairment loss was recordedat our Vertis Europe 

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segment and is included inthe loss from discontinued operations. Impairment in both cases was due to acombination of factors including operating performance and acquisition price.

(10)       Effective December 31, 2005, we adopted FIN 47 “Accountingfor Conditional Asset Retirement Obligations”. FIN 47 requires that companiesrecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated. Uponadoption of FIN 47, we estimated and accrued for the cost to retire ourleasehold improvements based on the present value of these costs. As a resultof the adoption, we recorded a cumulative effect of accounting change of $1.6million for the year ended December 31, 2005.

(11)       We are a party to an agreement to sell certain tradeaccounts receivable of certain of our subsidiaries (see Note 7 to ourconsolidated financial statements for a more detailed discussion). Theagreement allows for a maximum of $130.0 million of trade accounts receivableto be sold at any time based on the level of eligible receivables. We sell ourtrade accounts receivable through a bankruptcy-remote wholly-owned subsidiary,however, we maintain an interest in the receivables and are still responsiblefor the servicing and collection of those accounts receivable. The amount soldunder these facilities, net of retained interest, was $130.0 million at December 31,2005 and 2004, $122.5 million at December 31, 2003, $125.9 million at December 31,2002, and $130.0 million as of December 31, 2001. These amounts arereflected as reductions of Accounts receivable, net on our consolidated balancesheet included in this Annual Report.

(12)       A full quantitative reconciliation ofEBITDA to its most directly comparable GAAP measure, consolidated (loss) incomefrom continuing operations before cumulative effect of accounting change, isprovided as follows:

| ** **                                                                                  | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**       | ** ** | **2002**       | ** ** | **2001**       | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                                                                                  | ** ** | **(in thousands)** | ** ** |
| Consolidated loss  from continuing operations before cumulative effect of accounting change |       | $ (22,840          | )          | $   (916 | )          | $ (97,212 | )          | $ (17,981 | )          | $ (58,935 | )          |
| Interest expense,  net                                                                      |       | 128,821                 |       | 132,809                 |       | 136,557        |       | 134,374        |       | 132,816        |       |
| Income tax  (benefit) expense                                                               |       | (8,007                  | )          | (65,934                 | )          | 48,554         |       | (1,988         | )          | (23,552        | )          |
| Depreciation and  amortization of intangibles                                               |       | 64,731                  |       | 67,456                  |       | 76,262         |       | 81,770         |       | 93,393         |       |
| EBITDA                                                                                      |       | $ 162,705          |       | $ 133,415          |       | $ 164,161 |       | $ 196,175 |       | $ 143,722 |       |

 

(13)       Earnings were inadequate to cover fixedcharges by $31.0 million, $66.9 million, $48.9 million, $20.0 million and$82.9 million for the years ended December 31, 2005, 2004, 2003,2002 and 2001, respectively. See Exhibit 12.1 to this Annual Report forthis computation. Net loss for the years ended December 31, 2005,2004, 2003, 2002 and 2001, includes $64.7 million, $67.5 million, $76.3million, $81.8 million and $93.4 million, respectively, of non-cash depreciationand amortization expense.

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**ITEM 7**                   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section provides a review of the financialcondition and results of operations of Vertis during the three years ended December 31,2005. The analysis is based on the consolidated financial statements andrelated notes that are included elsewhere in this Annual Report, prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”).

**Introductory Overview**

***Executive Summary***

Vertis is a leading provider of targeted advertising,media and marketing services. We deliver a comprehensive range of solutionsthat simplify, improve and maximize the effectiveness of multiple phases of ourcustomers’ marketing campaigns from the inception of an advertising concept,through design, production, targeted distribution, and ultimately to providingadvertising effectiveness measurement.

We operate through two reportable business segmentsbased on the way management views and manages the Company. These businesssegments are Advertising Inserts and Direct Mail.  Advertising Inserts provides a full productline of printed targeted advertising products inserted into newspapers. DirectMail provides personalized direct mail products and various targeted directmarketing services. In addition, we also provide premedia and related servicesas well as media planning and placement services. These services will bereferred to as “Corporate and Other” for discussion with this Annual Report. Also,included in Corporate and Other are corporate costs incurred by the Company.

We use independent third-party source materials totrack statistics pertaining to advertising growth. Based on these publications,advertising growth in 2004 increased by approximately 7% domestically and 6%worldwide, which represents a shift back to the historical growth ratesexperienced prior to 2001. The projection for 2005 US advertising growth was a4.6% overall increase, and in 2006 projections estimate a 5.8% increase indomestic advertising spending.

Our operating performance in 2005 reflects stronggrowth in Direct Mail, which posted year-over-year growth in volume andpricing, including product, customer and equipment mix. Especially stronggrowth was realized in financial, pharmaceutical, and consumer product end-usergroups. With respect to Advertising Inserts, overcapacity in this portion ofthe advertising industry continued to fuel competitive pricing pressures andlowered our volume, which was only partially offset by improved pricing,including product, customer and equipment mix. Although it is difficult toquantify, we believe product, customer, and equipment mix, especially ininserts, are the major drivers in the improvement in pricing. These mix changesoccur routinely as customers manage their overall advertising spending. Generally,the decline in net sales in Advertising Inserts was broad-based, however,certain sectors within our retail customer base grew year-over-year, forexample drug stores and general merchandisers. Although not as significant interms of total net sales, the percentage decline from newspaper products was muchgreater than what we experienced in the retail space.

We expect the industry-wide overcapacity that hasimpacted Advertising Inserts to continue. To mitigate the negative impact ofindustry-wide overcapacity in this marketplace, we routinely maximize capacityutilization by allocating production to the most efficient equipment throughoutthe year. Additionally, in the first quarter of 2006 we closed our insertsproduction facility in Niles, Michigan.

Cost management continues to be a major focus of ours.Cost reductions have beenaccomplished through streamlining of shared service and corporate functions,combining operations, closing unprofitable locations, staff reductions andasset write-offs. These actions have resulted in the Company incurring approximately$129 million in restructuring charges since our recapitalization in 1999, ofwhich approximately $10 million related to restructurings within our Europeansegment. Our 2005 restructuring 

17

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activities yieldedyear-over-year savings of approximately $20 million, which offset otheroperating cost increases including staffing and energy costs.

On December 22, 2004, the Company entered into a$200 million, four-year revolving credit agreement (the “Credit Facility”).  The Credit Facility replaces the $250 millionrevolving credit facility that was to expire in December 2005 (the “PriorCredit Facility”). The Prior Credit Facility was repaid in full and terminatedconcurrent with the closing of the Credit Facility.

In November 2005, we entered into a new $130million three-year revolving trade receivables facility (the “A/R Facility”),terminating in December 2008, to sell substantially all trade accountsreceivable generated by subsidiaries in the U.S. through the issuance of $130.0million variable rate trade receivable backed notes. The A/R Facility replacesthe previous three-year agreement entered into in December 2002 (the “2002Facility”) which was due to expire on November 30, 2005. Funds advancedpursuant to the A/R Facility were used to pay off the remaining obligationsunder and terminate the 2002 Facility.

Liquidity continues to be a primary focus for theCompany. The Company has approximately $111.6 million available to borrow underthe Credit Facility, its primary source of funds. By terminating the PriorCredit Facility and entering into the Credit Facility, the Company hasincreased its financial flexibility by eliminating leverage and interest ratecoverage covenants. Under the Credit Facility, the Company is subject to aminimum EBITDA covenant requiring the Company to maintain EBITDA, as defined bythe Credit Facility, of $160 million on a trailing twelve-month basis. As of December 31,2005, the Company was in compliance with all of its covenants, financial orotherwise. While we currently expect to be in compliance in future periods,there can be no assurance that we will continue to meet the minimum EBITDArequired under the covenant. Based upon the latest projections for 2006,including results from January and February, we believe we will be incompliance in the upcoming year.

The Company continues to be highly leveraged. However,as a result of the refinancing of the Company’s revolving credit facility andother refinancings over the last few years, no significant debt repayments aredue until 2008 and beyond. This, combined with the elimination of the leverageand interest rate covenants as discussed above, has allowed the Company torestructure the business and focus on improving operations.

Capital expenditures amounted to approximately $42.2million, $45.6 million and $40.2 million in 2005, 2004 and 2003, respectively. Capitalspending has been directed toward projects that improve efficiency, maintainour infrastructure, and upgrade our equipment base. We expect the level ofcapital expenditures in 2006 to be relatively consistent with the 2005 level ofcapital expenditures.

A large portion of theCompany’s revenue is generally seasonal in nature. However, our efforts toexpand our other product lines as well as expand the market for our advertisinginserts to year-round customers, have reduced the overall seasonality of ourrevenues. Of our full year 2005 net sales, excluding the adjustment made in December 2005related to the change in our revenue recognition policy surrounding therecording of print revenue, 23.2% of net sales were generated in the firstquarter, 23.9% in the second, 24.8% in the third and 28.1% in the fourth. Thisadjustment is excluded here to present a more representative depiction of theCompany’s quarterly sales. See Note 3 to the consolidated financial statements,included elsewhere in this Annual Report, for further discussion of thisaccounting change. Profitability continues to follow a more seasonal patterndue to the higher margins and efficiencies gained from running at highercapacity during the fourth quarter holiday production season. On the otherhand, lower volume negatively impacts margins since we are not able to fullyleverage fixed depreciation, amortization, interest and other costs that areincurred evenly throughout the year. Based on our historical experience andprojected operations, we expect our operating results in the near future to bestrongest in the fourth quarter and softest in the first.

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***Discontinued Operations***

During the third quarter of 2005, the Companydetermined to account for the operations of its European segment as adiscontinued operation. The Company decided to sell the two divisions in thissegment primarily because each has incurred operating losses in the past twoyears and neither was deemed a fit within the Company’s overall strategy. Thedirect mail division of this segment was sold on October 3, 2005 and thepremedia division of this segment was sold on December 14, 2005.

The loss for Europe was$148.8 million and $10.2 million for the years ended December 31, 2005 and2004, respectively, and is included in discontinued operations on the Company’sconsolidated financial statements. Included in the 2005 loss are impairmentcharges of $136.2 million to write off the Europe goodwill and write-down otherEurope long-lived assets, and a $1.6 million loss on sale of our Europe segmentbased on net proceeds of $2.4 million. Net sales for Vertis Europe, which isalso included in the loss from discontinued operations for the years ended December 31,2005 and December 31, 2004, were $100.0 million and $138.6 million,respectively. Interest was not allocated to discontinued operations as theEuropean business was divested on a debt-free basis. Prior year financial statementshave been restated to present the operations of Vertis Europe as a discontinuedoperation. See Note 4 to our consolidated financial statements included in thisAnnual Report for further discussion.

***Restructuring***

In 2005 the Company began a restructuring program (the“2005 Program”) aimed at regionalizing and streamlining operations tocapitalize on operating efficiencies and improve productivity and consistency,and reducing the Company’s overall cost base. The 2005 Program includedreductions in work force of approximately 490 employees and the closure of sixpremedia facilities, one advertising inserts warehouse, and two advertisinginserts regional offices, some of which are associated with the consolidationof operations. The Company estimates the costs associated with actions takenunder the 2005 Program to be $19.9 million (net of estimated sublease income of$1.3 million), substantially all of which were recorded in 2005. The executionof the 2005 Program is complete as of December 31, 2005. Included in the2005 Program, are restructuring costs of $3.5 million related to reductions inworkforce of approximately 130 employees in the Company’s Europe segment. Thesecosts are included in the loss from discontinued operations on the Company’scondensed consolidated statement of operations. Cost savings achieved in 2005as a result of the 2005 Program were $19.6 million, $18.9 million of which werestaffing related with the remainder related to decreased facility costs. Thesesavings impacted both the cost of production and the selling, general andadministrative line items of the consolidated statement of operations includedelsewhere in this Annual Report. Annual cost savings expected in future yearsas a result of the 2005 Program are estimated at $27.9 million, $26.8 millionof which relate to expected staffing cost savings and $1.1 million related tofacility costs savings.

Liabilities for severance costs related to futurerestructurings are not accrued as the amounts cannot be reasonably estimated. TheCompany is continuously evaluating the need to implement restructuring programsto rationalize its costs and improve operating efficiency. It is likely thatthe Company will incur additional restructuring costs in 2006 in an on-goingeffort to achieve these objectives.

In the year ended December 31, 2005, under the2005 Program, the Advertising Inserts segment recorded $7.0 million inseverance and related costs associated with the elimination of approximately186 positions and $0.8 million in facility closure costs associated with theclosure of two regional offices and one warehouse. The Direct Mail segmentrecorded $2.0 million in severance and related costs in 2005 associated withthe elimination of approximately 33 positions.  Corporate and Other recorded $5.1 million inseverance and related costs in 2005 associated with the elimination ofapproximately 91 positions and $1.7 million in facility closure costsassociated with the closure of six premedia facilities offset by $0.1 millionin gains from the sale of assets related to the closure of one of the premediafacilities. Additionally, 

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$0.7 million in costs wererecorded in the first quarter of 2005 related to the amendment of an executivelevel employment agreement announced in 2004, as discussed below.

Included in the segment severance amounts above areapproximately $2.5 million of aggregate severance costs allocated to thesegments based on percentages established by management. These severance costsare related to the elimination of approximately 50 shared services positionsfor which the costs are allocated to the segments on a monthly basis.

In 2004, the Advertising Inserts segment recorded $0.2million in severance costs. Corporate and Other recorded $0.3 million inseverance costs due to headcount reductions of approximately 50 employees, and$3.5 million in facility closure costs. These costs were associated with the2003 Program discussed below. Additionally, in 2004 the Company announced anamendment of an executive level employment agreement resulting in an estimatedcost of $1.2 million. Corporate and Other recorded $0.5 million inrestructuring costs in 2004 related to this amendment.

The Company began a restructuring program in the U.S.and the U.K. in the third quarter of 2003 (the “2003 Program”), the executionof which was complete as of June 2004. The 2003 Program included theclosure of facilities, some of which were associated with the consolidation ofoperations; transfer of certain positions to the corporate office; reductionsin work force of approximately 260 employees; and the abandonment of assetsassociated with vacating these premises. As of December 31, 2004, costsassociated with the 2003 Program were $19.2 million (net of estimated subleaseincome of $7.7 million) of which approximately $3.0 million are non-cash costs.The Europe portion of the 2003 Program was complete as of December 31,2003. The North America portion of the 2003 Program was complete as of thesecond quarter of 2004, however an adjustment to reduce restructuring expenseof $3.0 million was made in December 2004 as the amount of facilityclosure costs expected to be paid was recalculated based on a revisedassumption of estimated sublease income.

In 2003 the Advertising Inserts segment and the DirectMail segment recorded, under the 2003 Program, $0.7 million and $0.2 million inseverance costs, due to headcount reductions of approximately 20 employeeseach, respectively. Also under the 2003 Program, Corporate and Other recorded$3.9 million in severance costs due to headcount reductions of approximately160 employees, $6.9 million in facility closure costs and $3.0 million in assetwrite-offs related to the closure of five facilities.

In connection with ourrestructuring actions discussed above, we recorded $17.1 million, $4.5 million,and $14.6 million of restructuring charges in the years ended December 31,2005, 2004 and 2003, respectively. We expect to pay $5.4 million of the accruedrestructuring costs in 2006 and the remainder, approximately $3.3 million, by2011. For more information about our restructuring charges, see Note 5 to ourconsolidated financial statements included in this Annual Report.

***Factors Affecting Comparability***

Several factors can affect the comparability of ourresults from one period to another. Primary among these factors are the cost ofpaper, changes in business mix, the timing of restructuring expenses and therealization of the associated benefits.

The cost of paper is a principal factor in our pricingtocertaincustomers since a substantial portion of net sales includes the cost of paper. Therefore,changes in the cost of paper and changes in the proportion of paper supplied byour customers significantly affects our revenue generated from the sale ofadvertising insert and direct mail products, both of which are products wherepaper is a substantial portion of the costs of production. Changes in the costof paper do not materially impact our net earnings since we are generally ableto pass on increases in the cost of paper to our customers, while decreases inpaper costs generally result in lower prices to customers.

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Variances in expenses expressed in terms of percentageof net sales can fluctuate based on changes in business mix and are influencedby the change in revenue directly resulting from changes in paper prices andthe proportion of paper supplied by our customers. As our business mix changes,the nature of products sold in a period can lead to offsetting increases anddecreases in different expense categories.

Also affecting thecomparability of the results from year-to-year are the following items:

·       Effectof the accounting policy revisions implemented in 2005 which include the revisionto our revenue recognition policy surrounding the recording of print revenueand a revision to our maintenance parts capitalization policy. These revisionsresulted in a $12.7 million decrease in revenue and a $16.0 million decrease incosts of production,

·       $44.0million loss in September 2004 from the termination of our leaseholdinterest in real estate properties (see further discussion in “*Sources of Funds*” section),

·       $10.1million insurance recovery in 2003 from a settlement to the legal proceedingarising from a life insurance policy which covered the former chairman ofVertis Holdings, and

·       $67.4million tax valuation allowance recorded in 2003 on deferred tax assets.

You should consider all ofthese factors in reviewing the discussion of our operating results.

**Results of Operations**

Thefollowing table presents major components from our consolidated statements ofoperations and consolidated statements of cash flows. 

| ** **                                    | ** ** | **Year ended December 31,** | ** ** | **Percentage of Sales** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **2005**                                   | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                    | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                     |       | $                                          | 1,510,288  |                              | $          | 1,506,839 |   | $ | 1,448,475 |   | 100.0 | % | 100.0 | % | 100.0 | % |
| Costs of  production                          |       | 1,166,708                                  |       | 1,160,473                         |       | 1,109,650 |   | 77.3 | % | 77.1 | % | 76.6 | % |
| Selling, general  and administrative          |       | 156,103                                    |       | 160,765                           |       | 165,775 |   | 10.3 | % | 10.7 | % | 11.4 | % |
| Restructuring  charges                        |       | 17,119                                     |       | 4,501                             |       | 14,649 |   | 1.1 | % | 0.2 | % | 1.0 | % |
| Depreciation and  amortization of intangibles |       | 64,731                                     |       | 67,456                            |       | 76,262 |   | 4.3 | % | 4.5 | % | 5.3 | % |
| Total operating  costs                        |       | 1,404,661                                  |       | 1,393,195                         |       | 1,366,336 |   | 93.0 | % | 92.5 | % | 94.3 | % |
| Operating income                              |       | $                                          | 105,627    |                              | $          | 113,644 |   | $ | 82,139 |   | 7.0 | % | 7.5 | % | 5.7 | % |
| **Other  data:**                              |       |                                       |       |                              |       |   |   |   |   |   |   |   |   |
| Cash flows provided by operating activities   |       | $                                          | 5,693      |                              | $          | 47,545 |   | $ | 89,046 |   |   |   |   |   |   |   |
| Cash flows used in investing activities       |       | 43,765                                     |       | 18,992                            |       | 40,903 |   |   |   |   |   |   |   |
| Cash flows  provided by (used in)             |       |                                       |       |                              |       |   |   |   |   |   |   |   |   |
| financing activities                          |       | 39,332                                     |       | (29,608                           | )          | (53,176 | ) |   |   |   |   |   |   |
| EBITDA                                        |       | 162,705                                    |       | 133,415                           |       | 164,161 |   | 10.8 | % | 8.9 | % | 11.3 | % |

 

EBITDA  represents income (loss) from continuingoperations before cumulative effect of accounting change, plus

·       interestexpense (net of interest income)

·       incometax expense (benefit), and

·       depreciationand amortization of intangibles.

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We present EBITDA here to provide additionalinformation regarding our performance and because it is the measure by which wegauge the profitability and assess the performance of our segments. EBITDA isnot a measure of financial performance in accordance with GAAP. You should notconsider it an alternative to net income as a measure of operating performanceor to cash flows from operating activities as a measure of liquidity. Ourcalculation of EBITDA may be different from the calculation used by othercompanies and therefore comparability may be limited. A full quantitativereconciliation of EBITDA to its most directly comparable GAAP measure, income(loss) from continuing operations before cumulative effect of accountingchange, is provided as follows:

| ** **                                                                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                    | ** ** |
| Loss from continuing  operations before cumulative effect of accounting change |       | $                                          | (22,840    | ) | $ | (916 | ) | $ | (97,212 | ) |
| Interest expense,  net                                                         |       | 128,821                                    |       | 132,809 |   | 136,557 |   |
| Income tax  (benefit) expense                                                  |       | (8,007                                     | )          | (65,934 | ) | 48,554 |   |
| Depreciation and  amortization of intangibles                                  |       | 64,731                                     |       | 67,456 |   | 76,262 |   |
| EBITDA                                                                         |       | $                                          | 162,705    |   | $ | 133,415 |   | $ | 164,161 |   |

 

**Resultsof Operations—2005 compared to 2004**

*Net Sales*

For the year ended December 31, 2005, ourconsolidated net sales increased $3.5 million, or 0.2%, from $1,506.8 millionin 2004 to $1,510.3 million in 2005.

At our AdvertisingInserts segment, net sales decreased $19.0 million, or 1.8%, from $1,065.2million for the year ended December 31, 2004 to $1,046.2 million for theyear ended December 31, 2005. The primary changes in Advertising Insertssales are as follows:

·       Thepass-through cost of paper increased by $27.0 million.

·       Volumedeclined by $49.7 million.

·       Pricing,including product, customer and equipment mix, increased by $11.2 million.

·       Includedin the net sales variance is a $7.4 million decrease resulting from the impactof the Company’s revision to its revenue recognition policy surrounding therecording of print revenue. See Note 3 to the consolidated financial statementsincluded elsewhere in this Annual Report for further discussion.

At our Direct Mailsegment, net sales increased $18.0 million, or 6.0%, from $297.9 million for theyear ended December 31, 2004 to $315.9 million for the year ended December 31,2005. The primary changes in Direct Mail sales are as follows:

·       Thepass-through cost of paper increased by $4.4 million.

·       Volumeincreased by $4.3 million.

·       Pricing,including product, customer and equipment mix, increased by $9.3 million.

·       Includedin the net sales variance is a $5.3 million decrease resulting from the impactof the Company’s revision to their revenue recognition policy surrounding therecording of print revenue. See Note 3 to the consolidated financial statementsincluded elsewhere in this Annual Report for further discussion.

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Corporate and Other net sales decreased $2.2 million,or 1.4%, from $153.5 million for the year ended December 31, 2004 to$151.3 million for the year ended December 31, 2005. The primary changesin Corporate and Other sales are lower premedia sales partially offset byincreased media and planning sales.

See also “*Segment Performance*” for a discussion ofEBITDA by segment.

*Operating Expenses*

For the year ended December 31, 2005, ourconsolidated costs of production increased $6.2 million, or 0.5%, from $1,160.5million in 2004 to $1,166.7 million in 2005, primarily attributable to a $31.4million increase in the cost of paper. Additional cost increases include $8.9million in freight costs and $4.8 million in utilities costs. Offsetting thesecost increases are decreases in the cost of ink and other material expensesconsumed, contract services related to the production process, and direct laboramounting to $12.1 million, $7.4 million, and $3.9 million, respectively. Additionally,in relation to the Company’s revision to our print revenue recognition policyand our maintenance parts capitalization policy, decreases in costs ofproduction of $9.8 million and $6.2 million were recognized in 2005,respectively (see Note 3 to the consolidated financial statements included inthis Annual Report).  These changesexclude the impact of volume changes on the Company’s cost of production.

Selling, general and administrative expenses decreased$4.7 million, or 2.9%, for the year ended December 31, 2005, from $160.8 million in 2004 to $156.1 million in2005. This change is attributable to a $7.1 million decrease in staffing costsoffset by a $2.0 million write-off of amounts owed to the Company by a bankruptcustomer.

Restructuring charges forthe year ended December 31, 2005 totaled $17.1 million as compared to $4.5million in 2004. See the “*Restructuring*”section for a detailed discussion of restructuring charges.

*Other Expenses(Income)*

Interest expense, net decreased $4.0 million in theyear ended December 31, 2005 as compared to 2004. Included in the 2004interest amount was $1.8 million of deferred financing fees written off inconnection with the termination of our Prior Credit Facility (as defined in the“*Debt Financing*” section) in December 2004.Replacing the Prior Credit Facility was the Credit Facility (as defined in the “*Debt Financing*” section), which included lower funding coststhan the prior agreement. Additionally, the Company held more US dollardenominated debt in 2005 than in 2004. This debt carried a lower rate ofinterest than borrowings in British pounds sterling, thus contributing to thedecrease in interest expense. All of these factors, coupled with a loweraverage revolver balance, effectively offset an increase in interest ratesrelated to the Credit Facility in 2005.  See Note 11 to our consolidated financial statementsincluded in this Annual Report for further discussion of debt and relatedtransactions.

Other, net decreased $40.0million for the year ended December 31, 2005 from $47.7 million in 2004 to$7.7 million. This decrease is primarily due to a $44.0 million non-cash lossrecorded in 2004 related to the termination of our leasehold interest in fivereal estate properties in two lease-leaseback transactions entered into in 1998(see “*Sources of Funds*” section).For a more detailed discussion of the other miscellaneous components of Other,net see Note 18 to our consolidated financial statements included in thisAnnual Report.

*Loss fromcontinuing operations before cumulative effect of accounting change*

Loss from continuingoperations before cumulative effect of accounting change was $22.8 million forthe year ended December 31, 2005, an increase of $21.9 million compared toa loss of $0.9 million for the year ended December 31, 2004. Included inthe 2005 loss is an $8.3 million income tax benefit related to an agreementwith the Internal Revenue Service to settle a tax liability relating to thetermination of 

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leaseholdinterests discussed in the “*Sources of Funds*”section  (see also “Other Factors”section below). Included in the 2004 loss is the $44.0 million loss from thetermination of leasehold interests offset by a $66.7 million tax benefitrelated to the loss. Excluding these items, loss from continuing operationsbefore cumulative effect of accounting change increased $7.5 million, or 31.8%in 2005 as compared to 2004. Included in this increase is a $12.6 millionincrease in restructuring charges, the components of which are discussed above.The balance of the increase in loss from continuing operations reflects theaforementioned changes in net sales and costs, as discussed above. See also “*Segment Performance*” below.

*Segment Performance*

Set forth below is a discussion of the performance ofour business segments based on EBITDA, which is the measure reported to ourchief operating decision maker for the purpose of making decisions aboutallocating resources to the segment and assessing performance of the segment. Atabular reconciliation of segment EBITDA to its most directly comparableconsolidated GAAP measure, income (loss) from continuing operations beforecumulative effect of accounting change, in accordance with Financial AccountingStandards Board (“FASB”) Statement No. 131, “Disclosure about Segments ofan Enterprise and Related Information”, is contained in Note 21 to ourconsolidated financial statements included elsewhere herein.

At the AdvertisingInserts segment, EBITDA amounted to $125.4 million for the year ended December 31,2005, a decrease of $18.2 million, or 12.7%, compared to $143.6 million in thecomparable 2004 period. The primary changes in EBITDA are as follows:

·       Volumedeclined by $24.9 million.

·       Pricing,including product, customer and equipment mix, increased by $18.9 million.

·       Restructuringcosts increased $7.6 million and utility costs and freight costs, both adjustedfor volume, increased $5.8 million and $4.7 million, respectively.

·       Offsettingthe decline in EBITDA is a $3.7 million net effect of the accounting revisionsimplemented in 2005 which include the revision to our revenue recognitionpolicy surrounding the recording of print revenue and a revision to ourmaintenance parts capitalization policy. These accounting revisions resulted inan increase in EBITDA from the prior year. See Note 3 to the consolidatedfinancial statements included elsewhere in this Annual Report.

At the Direct Mailsegment, EBITDA amounted to $41.8 million for the year ended December 31,2005, an increase of $3.8 million, or 10.0%, compared to $38.0 million in thecomparable 2004 period. The primary changes in EBITDA are as follows:

·       Volumeincreased by $3.1 million.

·       Pricing,including product, customer and equipment mix, increased by $11.8 million.

·       Restructuringcosts increased $2.0 million. Additionally, other costs increased an aggregateof $9.3 million, primarily in repairs and maintenance, certain rawmaterials and staffing costs.

·       Theimpact of the accounting revisions implemented in 2005, which include the revisionto our revenue recognition policy surrounding the recording of print revenueand a revision to our maintenance parts capitalization policy, resulted in a$461 thousand decrease in Direct Mail EBITDA.

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Corporate and Otherrecorded an EBITDA loss of $4.4 million for the year ended December 31,2005, a decrease of $43.8 million, or 90.9%, compared to a $48.2 million EBITDAloss for the year ended December 31, 2004. The primary changes in EBITDAare as follows:

·       Aloss of $44.0 million was incurred in 2004 from the termination of ourleasehold interest in real estate properties.

·       Restructuringcosts increased $3.1 million.

**Resultsof Operations—2004 compared to 2003**

*Net Sales*

For the year ended December 31, 2004, ourconsolidated net sales increased $58.3 million, or 4.0%, from $1,448.5 millionin 2003 to $1,506.8 million in 2004.

At our AdvertisingInserts segment, net sales increased $48.7 million, or 4.8%, from $1,016.5million for the year ended December 31, 2003 to $1,065.2 million for theyear ended December 31, 2004. The primary changes in Advertising Insertssales are as follows:

·       Thepass-through cost of paper increased by $47.7 million.

·       Volumeincreased by $10.5 million.

·       Pricing,including product, customer and equipment mix, declined by $11.4 million.

At our Direct Mailsegment, net sales increased $6.9 million, or 2.4%, from $291.0 million for theyear ended December 31, 2003 to $297.9 million for the year ended December 31,2004. The primary changes in Direct Mail sales are as follows:

·       Thepass-through cost of paper increased by $2.2 million.

·       Volumeincreased by $14.3 million.

·       Pricing,including product, customer and equipment mix, declined by $8.5 million.

Corporate and Other net sales decreased $5.9 million,or 3.7%, from $159.4 million for the year ended December 31, 2003 to$153.5 million for the year ended December 31, 2004. The primary changesin Corporate and Other sales are due to lower premedia sales partially offsetby increased media and planning sales.

See also “*Segment Performance*” for a discussion ofEBITDA by segment.

*Operating Expenses*

For the year ended December 31, 2004, ourconsolidated costs of production increased $50.8 million, or 4.6%, from$1,109.7 million in 2003 to $1,160.5 million in 2004. The increase in paper andink consumed represents $53.0 million for the year ended December 31, 2004.Additional increases in costs of production are attributable to higher energycosts, freight, repairs and maintenance and contract services. Offsetting theseincreased costs are decreases in staffing costs, particularly direct labor,group insurance and the cost of other materials used in the production process.

Restructuring charges forthe year ended December 31, 2004 totaled $4.5 million. The comparable 2003period included restructuring charges of $14.6 million. In 2004, theAdvertising Inserts segment recorded $0.2 million in severance costs. Corporateand Other recorded $0.3 million in severance costs due to headcount reductionsof approximately 50 employees, and $3.5 million in facility closure costs. Thesecosts were associated with the 2003 Program discussed below. Additionally, in2004 the Company announced an amendment of an executive level employmentagreement resulting in an estimated cost of 

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$1.2million. Corporate and Other recorded $0.5 million in restructuring costs in2004 related to this amendment.

*Other Expenses(Income)*

Interest expense, net decreased $3.7 million in theyear ended December 31, 2004 as compared to 2003. Included in the 2003interest amount was $11.0 million of deferred financing fees written off inconnection with the retirement of the Term A and B loans, as well as $6.6million in interest expense recorded on these loans prior to their write off inJune 2003. In 2004, we recorded a full year of interest expense, $34.1million, on the 9 3⁄4% senior secured second lien notes which were issued in June 2003as compared to seven months of interest expense, $19.4 million, in 2003. This$14.7 million increase in interest expense was more than offset by the $17.6 milliondecrease from the prior year associated with the 2003 amounts discussed above. SeeNote 11 to our consolidated financial statements included in this Annual Reportfor further discussion of debt and related transactions.

The $53.5 millionyear-over-year change in Other, net from $5.8 million of income in 2003 to$47.7 million of expense in 2004 is primarily due to the $44.0 million non-cashloss associated with the termination of the Company’s leasehold interest in theproperties as discussed in the “*Sources ofFunds*” section, and a $10.1 million recovery recorded in 2003received from a settlement to the legal proceeding arising from a lifeinsurance policy which covered the former Chairman of Vertis Holdings, Inc.For a more detailed discussion of the other miscellaneous components of Other,net see Note 18 to our consolidated financial statements included in thisAnnual Report.

*Loss fromcontinuing operations before cumulative effect of accounting change*

Loss from continuingoperations before cumulative effect of accounting change was $0.9 million forthe year ended December 31, 2004, a decrease of $96.3 million, or 99.1%,compared to a loss of $97.2 million for the year ended December 31,2003. During 2004, we recorded a tax benefit of $65.9 million of which $66.7million was the result of the termination of our leasehold interest in the realestate properties as discussed above. Included in the 2003 net loss is anincrease of $67.4 million in the tax valuation allowance on deferred tax assets(see “Other Factors” below).  Loss fromcontinuing operations before income taxes and cumulative effect of accountingchange increased from the comparable prior year period by $18.2 million. Thisincrease is a result of the changes in net sales and costs, as discussed above.

*Segment Performance*

Set forth below is a discussion of the performance ofour business segments based on EBITDA, which is the measure reported to ourchief operating decision makers for the purpose of making decisions aboutallocating resources to the segment and assessing performance of the segment. Atabular reconciliation of segment EBITDA to the directly comparableconsolidated GAAP measure, (loss) income from continuing operations beforecumulative effect of accounting change, in accordance with Financial AccountingStandards Board (“FASB”) Statement No. 131, “Disclosure about Segments ofan Enterprise and Related Information”, is contained in the notes to ourconsolidated financial statements included elsewhere herein.

At the AdvertisingInserts segment, EBITDA amounted to $143.6 million for the year ended December 31,2004, an increase of $4.6 million, or 3.3%, compared to $139.0 million in thecomparable 2003 period. The primary changes in EBITDA are as follows:

·       Volumeincreased by $5.3 million.

·       Pricing,including product, customer and equipment mix, declined by $2.0 million.

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At the Direct Mailsegment, EBITDA amounted to $38.0 million for the year ended December 31,2004, an increase of $3.8 million, or 11.1%, compared to $34.2 million in thecomparable 2003 period. The primary changes in EBITDA are as follows:

·       Volumeincreased by $10.1 million.

·       Pricing,including product, customer and equipment mix, declined by $4.9 million.

Corporate and Otherrecorded an EBITDA loss of $48.2 million for the year ended December 31,2004, an increase in loss of $39.2 million, or greater than 100%, compared to a$9.0 million EBITDA loss for the year ended December 31, 2003. The primarychanges in EBITDA are as follows:

·       Aloss of $44.0 million was incurred in 2004 from the termination of ourleasehold interest in real estate properties.

·       Restructuringcosts decreased $9.5 million.

·       Theremainder of the change was driven by the revenue decline as discussed in the “*Net Sales*” section above.

**Liquidity and Capital Resources**

***Sources of Funds***

We fund our operations, acquisitions and investmentswith internally generated funds, revolving credit facility borrowings, sales ofaccounts receivable, and issuances of debt.

We believe that the facilities in place, as well asour cash flows, will be sufficient to meet operational needs (including capitalexpenditures, restructuring costs and interest payments) for the next twelvemonths and beyond. At December 31, 2005, we had approximately $111.6million available to borrow under our revolving credit facility (the “CreditFacility” as defined in the “*Debt Financing*”section below). The maximum availability under the Credit Facility is $200million, limited to a borrowing base calculated as follows: 85% of the Company’seligible receivables; 65% of the net amount of eligible raw materials, finishedgoods, maintenance parts, unbilled receivables and the residual interest in theCompany’s $130 million trade receivables securitization (see Note 7 to theconsolidated financial statements included elsewhere in this Annual Report);and 45% of eligible machinery, equipment and owned real estate. The eligibilityof such assets included in the calculation is set forth in the credit agreement.In addition, as is customary in asset-based agreements, there is a provisionfor the agent, in its reasonable credit judgment, to establish reserves againstavailability based on a change in circumstances. The agent’s right to alterexisting reserves requires written consent from the borrowers when ComplianceEBITDA, as defined in Note 11 to the consolidated financial statements, is inexcess of $180 million on a quarterly trailing twelve-month basis. The agent isnot required to obtain written consent when Compliance EBITDA on a quarterlytrailing twelve-month basis is less than $180 million. At December 31,2005, the Company’s borrowing base was calculated to be $201.1 million and theCompany’s Compliance EBITDA was $182.5 million.

There can be no assurance, however, that ouroperations will generate sufficient cash flows or that we will always be ableto refinance our current debt. In the event we are unable to obtain sufficientfinancing, we would pursue other sources of funding such as debt offerings byVertis Holdings, equity offerings by us and/or Vertis Holdings or asset sales.

On September 14, 2004, we entered into atermination and release agreement whereby we terminated our leasehold interestin five real estate properties located in Austria. As a result of thistransaction, we received net proceeds of approximately $31 million, aftertransaction expenses. These proceeds were 

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applied against ourrevolving credit facility. As a result of the transaction, we recorded anon-cash loss related to the termination and release of $44.0 million and a taxbenefit of $66.7 million.

Items that could impactour liquidity are described below.

**Contractual Obligations**

The following tablediscloses aggregate information about our contractual obligations as of December 31,2005 and the periods in which payments are due:

| **Contractual Obligations**    | ** ** | ** ** | ** ** | **Total**           | ** ** | **Less than  1 year** | ** ** | **1–3 years** | ** ** | **3–5 years** | ** ** | **After  5 years** | ** ** |
|-------------------------------------|------------|------------|------------|---------------------|------------|---------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **(In  thousands)** | ** ** |
| Long-term debt                      |       | $          | 1,049,059  |                |       |                            | $          | 69,864                  |       | $                       | 979,195    |                    |       |   |
| Interest payments(1)                |       | 398,495    |       | $111,809            |       | 223,619                         |       | 63,067                  |       |                    |       |
| Operating leases                    |       | 85,031     |       | 25,477              |       | 29,226                          |       | 14,531                  |       | $15,797                 |       |
| Total contractual cash  obligations |       | $          | 1,532,585  |                | $          | 137,286                         |       | $                       | 322,709    |                    | $          | 1,056,793               |       | $ | 15,797 |   |
|                                     |            |            |            |                     |            |                                 |            |                         |            |                         |            |                         |            |  |  |  |  |  |

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(1)          Interest payments relateonly to the interest on the Company’s debt for which the interest rate is fixed.The amount excludes interest owed under the Company’s revolving creditfacility, for which the interest rate fluctuates. For further discussion, seeNote 11 to the consolidated financial statements included in this Annual Report.The balance of the revolving credit facility at December 31, 2005 was$69.9 million and the weighted-average interest rate was 7.33%.

The Company has contractscovering the purchases of ink and press supplies, (i.e. plates, blankets,solutions). These contracts, which range from 1 to 3 years in length, includetarget minimum quantities and prices. All of these agreements allow forshortfalls of purchase minimums to be made up over the life of the contract. Inaddition, each of the agreements allows for the reduction in obligations for adecline in volume experienced by Vertis, and all have competitive pricingclauses, whereby suppliers’ prices must remain competitive in the market or thepurchase minimums can be adjusted. Because of these variable factors, theamounts are not included in the table above.

*Debt Financing*

On December 22, 2004, we entered into a $200million, four-year revolving credit agreement (the “Credit Facility”)consisting of a revolving credit facility of up to $200 million that providesfor issuances of up to $45 million in letters of credit. The Credit Facilitymatures December 22, 2008 with no repayment of principal until maturity. TheCredit Facility replaced the $250 million revolving credit facility that was toexpire in December 2005 (the “Prior Credit Facility”). The Prior CreditFacility was terminated on December 22, 2004 and the outstanding balance,totaling $102.9 million, was repaid in full using funds from the CreditFacility. No early termination penalties were incurred.

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Our Credit Facility, theoutstanding 9 3/4% notes due April 1, 2009, the outstanding 10 7/8% notesdue June 15, 2009, and the outstanding 13 1/2% senior subordinated notesdue December 7, 2009 all contain customary covenants includingrestrictions on dividends and investments. In particular, these debtinstruments all contain high-yield debt covenants imposing limitations on thepayment of dividends or other distributions on or in respect of our capitalstock. Substantially all of our assets are pledged as collateral for theoutstanding debt under the Credit Facility. All of our debt has customaryprovisions requiring prepayment in the event of a change in control and fromthe proceeds of asset sales, as well as cross-default provisions. In addition,the Credit Facility includes a minimum EBITDA covenant requiring us to maintainCompliance EBITDA of $160 million on a trailing twelve-month basis. At December 31,2005, our trailing twelve-month Compliance EBITDA as calculated under thecredit agreement is $182.5 million. If we are unable to maintain this minimumCompliance EBITDA amount, the bank lenders could require us to repay anyamounts owing under the Credit Facility. At December 31, 2005, we were incompliance with our debt covenants.

While we currently expectto be in compliance in future periods, there can be no assurance that ourfinancial covenants will continue to be met. Based upon the latest projectionsfor 2006, including actual results for January and February, we believe we willbe in compliance in the upcoming year. For further information on our long-termdebt, see Note 11 to the consolidated financial statements included elsewherein this Annual Report.

*Off-Balance Sheet Arrangements*

In December 2002, weentered into a three-year agreement, due to expire on November 30, 2005,to sell substantially all trade accounts receivable generated by subsidiariesin the U.S. (the “2002 Facility”) through the issuance of $130.0 millionvariable rate trade receivable backed notes. In November 2005, we enteredinto a new $130 million three-year revolving trade receivables facility (the “A/RFacility”) terminating in December 2008. Funds advanced pursuant to theA/R Facility were used to pay off the remaining obligations under and terminatethe 2002 Facility.

Under the A/R Facility, aswell as the 2002 Facility previously in place, the Company sells its tradeaccounts receivable through a bankruptcy-remote wholly-owned subsidiary. However,we maintain an interest in the receivables and have been contracted to servicethe accounts receivable. We received cash proceeds for servicing of $3.0million and $3.2 million in 2005 and 2004, respectively. These proceeds arefully offset by servicing costs.

The A/R Facility allowsfor a maximum of $130.0 million of trade accounts receivable to be sold at anytime based on the level of eligible receivables and limited to a borrowing baselinked to net receivables balances and collections. Additional deductions maybe made if we fail to maintain a consolidated Compliance EBITDA of at least$180 million for any rolling four fiscal quarter period. Compliance EBITDA isthe Consolidated EBITDA as reflected in Note 21 to our financial statements,included elsewhere herein, adjusted for certain items as defined in the creditagreement. In addition, the A/R Facility includes certain targets related toits receivables collections and credit experience including a minimum EBITDA of$160 million. There are also covenants customary for facilities of this typeincluding requirements related to the characterization of receivablestransactions, credit and collection policies, deposits of collections,maintenance by each party of its separate corporate identity includingmaintenance of separate records, books, assets and liabilities and disclosuresabout the transactions in the financial statements of Vertis Holdings and itsconsolidated subsidiaries. Failure to meet the targets or the covenants couldlead to an acceleration of the obligations under the A/R Facility or the saleof assets securing the A/R Facility.

At December 31, 2005and 2004, accounts receivable of $130.0 million had been sold under both theA/R Facility and the 2002 Facility, respectively, and as such are reflected asreductions of accounts receivable. At December 31, 2005 and 2004, weretained an interest in the pool of receivables in the form 

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ofovercollateralization and cash reserve accounts of $71.8 million and $58.0million, under the A/R Facility and the 2002 Facility respectively, which isincluded in Accounts receivable, net on the consolidated balance sheet atallocated cost, which approximates fair value. The proceeds from collectionsreinvested in securitizations amounted to $1,595.7 million and $1,558.4 millionin 2005 and 2004, respectively.

Fees for the program varybased on the amount of interests sold and the London Inter Bank Offered Rate (“LIBOR”)plus an average margin of 50 basis points under the A/R Facility and 90 basispoints under the 2002 Facility. The loss on sale, which approximated the fees,totaled $5.2 million in 2005, $3.1 million in 2004 and $2.6 million in 2003,and is included in Other, net.

We have no otheroff-balance sheet arrangements that may have a material current or futureeffect on financial condition, changes in financial condition, results ofoperations, liquidity, capital expenditures, capital resources or significantcomponents of revenues or expenses.

*Working Capital*

Our current liabilitiesexceeded current assets by $74.1 million at December 31, 2005 and by $72.7million at December 31, 2004. This represents a decrease in workingcapital of $1.4 million for the year ended December 31, 2005. Included inthe current asset and current liability amounts for 2004 are amounts held forsale related to our Vertis Europe segment.  The two divisions comprising our Vertis Europesegment were sold in the fourth quarter of 2005 (see “*Discontinued Operations*” section), andtherefore our 2005 consolidated balance sheet does not include Vertis Europe. Excludingthe current assets and current liabilities held for sale in 2004, our currentliabilities exceeded current assets by $88.8 million at December 31, 2004.This represents an increase in working capital from continuing operations of$14.7 million for the year ended December 31, 2005. The excess of currentliabilities over current assets reflects the impact of accounts receivable soldunder the A/R Facility.

We use the proceeds fromthe accounts receivable sales to reduce long-term borrowings under ourrevolving credit facility. After the sale of all trade accounts receivable,however, we still retain an interest in the receivables in the form ofover-collateralization and cash reserve accounts, and we have been contractedto service the receivables. Therefore, if we add back the accounts receivable of$130.0 million sold under the A/R Facility as of December 31, 2005 and2004, and reflect the offsetting increase in long-term debt as if the A/RFacility were not in place, our working capital from continuing operations atDecember 31, 2005 and December 31, 2004 would have been $55.9 millionand $41.2 million, respectively. The ratio of current assets to currentliabilities as of December 31, 2005 was 0.76 to 1 (1.18 to 1, excludingthe impact of the A/R Facility) compared to 0.71 to 1 as of December 31, 2004(1.13 to 1, excluding the impact of the A/R Facility).

The increase in workingcapital after adding back accounts receivable sold under the A/R Facility wasdue primarily to fluctuations in operating assets and liabilities, mainlyaccounts receivable and accounts payable.

**Summary of CashFlows**

*Cash Flows from Operating Activities*

Net cash provided bycontinuing operating activities in 2005 decreased by $43.9 million from the2004 level.   This decrease is primarilythe result of changes in the timing of the settlement of payables andcollection of receivables.

Net cash provided bycontinuing operating activities in 2004 decreased by $28.4 million from the2003 level. This is principally the result of a use of cash in accounts payableof $15.4 million in 2004 versus a source of cash of $15.2 million in 2003.

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Net cash used in theoperating activities of discontinued operations decreased by $2.0 million in2005 from the 2004 level. In 2004, net cash used in the operating activities ofour discontinued operations was $8.4 million compared to net cash provided bythe operating activities of our discontinued operations of $4.8 million in 2003.

*Cash Flows fromInvesting Activities*

Net cash used for investing activities in 2005increased by $24.8 million from the 2004 level, primarily due to the $31.1million in proceeds received in 2004, as discussed below, and $3.4 million inexpenditures in 2005 related to our acquisition of Elite (see Note 6 to our financial statements includedelsewhere within this Annual Report).  Offsetting these amounts is $2.4 million innet proceeds received from the sale of our Vertis Europe divisions (see “*Discontinued Operations*” section). Additionally,included in the change in cash used in investing activities is a $3.7 milliondecrease associated with investing activities of our discontinued operations.

Net cash used forinvesting activities in 2004 decreased by $21.9 million when compared to 2003,primarily due to proceeds of $31.1 million from the termination of ourleasehold interest in real estate properties (see “*Sources of**Funds*”above) offset by a $5.4 million increase in capital expenditures in 2004 and a$2.1 million decrease in proceeds from the sale of property, plant and equipment.

*Cash Flows fromFinancing Activities*

In 2005, net cash provided by financing activities was$39.3 million as compared to a $29.6 million net usage of cash in 2004. Financingactivities of our discontinued operations contributed $10.3 million of thisfluctuation. The majority of the remainder relates to funding fluctuationsunder our revolving credit facility which reflect the relative levels of cashprovided by operating activities and capital expenditures in each respectiveyear.

In 2004, net cash used infinancing activities decreased $23.6 million, $17.3 million of which wasassociated with our discontinued operations. During 2004 we entered into a $200million, four-year revolving credit agreement and terminated the Prior CreditFacility, repaying the outstanding balance of $102.9 million using funds fromthe Credit Facility. Net cash used in financing activities in 2004 reflectsthese debt transactions.

**Other Factors**

On August 30, 2005, we reached a tentativesettlement agreement with the IRS resolving disputes over the tax deductibilityof net losses relating to the five leasehold interests in real estateproperties that we entered into in 1998, and which we terminated in the thirdquarter of 2004 (see “*Sources of Funds*”).On January 23, 2006, we signed a closing agreement with the IRS. Theclosing agreement is subject to final approval from the Congressional JointCommittee on Taxation. As a result of this settlement agreement, we reduced ourtax reserves related to the IRS examination from $10.3 million to $ 2.0 million.The remaining amount owed to the IRS and state tax authorities is classified asaccrued income taxes in the consolidated balance sheet included in ourfinancial statements. The reduction resulted in an $8.3 million tax benefit in2005.

Additionally, in the fourth quarter of 2005, we soldthe stock of our Europe direct mail subsidiary which generated a capital losscarryforward in the U.S. of $137.0 million. Also in the fourth quarter, ourEurope premedia subsidiary sold the stock of its subsidiaries generating a U.K.capital loss carryforward of  $29.0million. The U.S. capital loss carryforward expires in 2011. The U.K. capitalloss can be carried forward indefinitely.

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At the end of 2005, the Company’s net operating losscarryforwards were $217.0 million. This amount is included in the consolidatedVertis Holdings net operating loss carryforward. The carryforwards expirebeginning in 2007 through 2026.

Our valuation allowance relatedto our deferred tax asset, which was $40.5 million at the beginning of 2005,was increased by $92.0 million to $132.5 million at the end of 2005. Thevaluation allowance reserves all deferred tax assets that will not be offset byreversing taxable temporary differences. This treatment is required under SFAS No. 109,“Accounting for Income Taxes”, when in the judgment of management, it is notmore likely than not that sufficient taxable income will be generated in thefuture to realize the deductible temporary difference. Our deferred tax assetsand tax carryforwards remain available to offset taxable income in futureyears, thereby lowering any future cash tax obligations. We intend to maintaina valuation allowance until sufficient positive evidence exists to support itsreversal.

**New Accounting Pronouncements**

In December 2004, the FASB issued SFAS 123R,which requires all share-based payments to employees, including grants ofemployee stock options and restricted stock, to be recognized in the financialstatements based on their grant date fair values. The proforma disclosurespreviously permitted under SFAS No. 123 will no longer be an alternativeto financial statement recognition. Under SFAS 123R, companies must determinethe transition method, either retroactive or prospective, to be used at thedate of adoption; the appropriate fair value model to be used for valuingshare-based payments; and the amortization method for compensation cost. Theprovisions of this Statement shall be effective for us in the reporting periodbeginning January 1, 2006. The adoption of this statement is not expectedto have a material impact on our results of operations or financial position.

In March 2005, the FASB issued FIN 47, “Accountingfor Conditional Asset Retirement Obligations”, an interpretation of FASBStatement No. 143. FIN 47 requires that Companies recognize a liabilityfor the fair value of a conditional asset retirement obligation if the fairvalue of the liability can be reasonably estimated. This interpretation iseffective no later than the end of fiscal years ending after December 15,2005. Retrospective application for interim financial information is permittedbut is not required. Early adoption of this Interpretation is encouraged. Weadopted FIN 47 in 2005 and as a result recorded a $1.6 million cumulativeeffect of accounting change (see our consolidated statement of operationsincluded elsewhere in this Annual Report).

In May 2005, the FASBissued SFAS No. 154 “Accounting Changes and Error Corrections—AReplacement of APB Opinion No. 20 and FASB Statement No. 3”. ThisStatement requires retrospective application to prior periods’ financialstatements of changes in accounting principle, unless it is impracticable todetermine either the period-specific effects or the cumulative effect of thechange. This Statement does not change the guidance for reporting thecorrection of an error in previously issued financial statements or a change inaccounting estimate.  The provisions ofthis Statement shall be effective for accounting changes and correction oferrors made in fiscal years beginning after December 15, 2005. We are notable to assess at this time the future impact of this Statement on ourconsolidated financial position or results of operations.

In February 2006, theFASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments—an amendment of Statements No. 133 and 140” (“SFAS 155”),which amends SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities” and SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishment of Liabilities”. SFAS 155permits fair value remeasurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation,clarifies which interest-only strips and principal-only strips are not subjectto the requirements of SFAS No. 133, establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial 

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instrumentsthat contain an embedded derivative requiring bifurcation, clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives, and amends SFAS No. 140 to eliminate the prohibition on aqualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. SFAS 155 is effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. The Company is not able to assess at thistime the future impact of this Statement on its consolidated financial positionor results of operations.

**Applicationof Critical Accounting Policies**

Our significant accountingpolicies are described in Note 2 to our consolidated financial statementsincluded in this Annual Report. Several accounting policies require theapplication of significant judgment by management in selecting the appropriateassumptions for calculating financial estimates. By their nature, thesejudgments are subject to an inherent degree of uncertainty. We base ourestimates and judgments on historical experience, terms of existing contracts,observance of trends in the industry, information provided by customers andoutside sources and various other assumptions that we believe to be reasonableunder the circumstances. Significant accounting policies which we believeinvolve the application of significant judgment and discretion by managementand are therefore “critical” accounting policies include:

*Revenue Recognition*

We provide a wide varietyof print and print related services and products for specific customers,primarily under contract. Revenue is not recognized until the earnings processhas been completed in accordance with the terms of the contracts. Print revenueis recognized when the product is shipped. Revenue from premedia operations isrecognized upon the completion of orders. Unbilled receivables are recorded forcompleted services or products which remain unbilled as of the period end.

In 2005, the Companyrevised its revenue recognition policy. Under the new policy, revenue forprinted materials is recognized when the product is shipped. Previously,revenue was recorded when these materials were completed and off press. This revisionresulted in a $12.7 million decrease in revenue and a $2.9 milliondecrease in net income for the year ended December 31, 2005. Additionally,unbilled accounts receivable increased by $12.7 million and finished goodsinventory balances increased by $9.8 million as a result of the change.

The Company chargescustomers for shipping and handling charges. The amounts billed to customersare recorded as net sales and actual charges paid by the Company are includedin costs of production in the consolidated statements of operations.

*Allowance forDoubtful Accounts*

We maintain allowances fordoubtful accounts for estimated losses resulting from the failure of ourcustomers to make payments. If actual customer payments are less than ourestimates, we would need to increase the allowance for doubtful accounts, whichwould adversely affect our results of operations. See the Financial StatementSchedule, which accompanies the Financial Statements in this Annual Report on Form 10-K,for a history of our charges to the allowance for doubtful accounts andwrite-offs taken over the three-year period ended December 31, 2005.

*Long-lived Assets*

We evaluate therecoverability of our long-lived assets, including property, plant andequipment and intangible assets, when there are changes in economic circumstancesor business objectives that indicate the carrying value may not be recoverable.Our evaluations include estimated future cash flows, profitability andestimated future operating results and other factors determining fair value. Asthese 

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assumptionsand estimates may change over time, it may or may not be necessary to recordimpairment charges.

*Income Taxes*

We record a valuationallowance to reduce our deferred tax assets to the amount that we believe ismore likely than not to be realized. We estimate future taxable income inassessing the need for the valuation allowance. In the event we determine thatwe would not be able to realize all or part of our net deferred tax assets inthe future, an adjustment to the deferred tax assets would be charged to incomein the period such determination was made. Likewise, should we determine thatwe would be able to realize our deferred tax assets in the future in excess ofour net recorded amount, an adjustment to the deferred tax assets wouldincrease income in the period that determination was made.

*Defined Benefit Pension Plans*

Accounting for definedbenefit pension plans requires various assumptions, including, but not limitedto discount rates, expected rates of return on plan assets and futurecompensation rates. We evaluate these assumptions at least once each year andmake changes as conditions warrant. Changes to these assumptions will increaseor decrease our reported income, which will result in changes to the recordedbenefit plan assets and liabilities.

We determined the discountrates using a measurement date of December 31, 2005. The weighted averagediscount rate assumed in 2005 was 5.50%. We developed our expected long-termrate of return assumption based on historical experience and by evaluatinginput from the trustee managing the plans’ assets. Our expected long-term rateof return on plan assets is based on a target allocation of assets as follows:60% for equity and 40% for fixed income securities. We assumed returns of 9%-11%for the equity securities and 6.5% for fixed income securities.

**Item7A.**                QUALITATIVE ANDQUANTITATIVE DISCLOSURES ABOUT MARKET RISK

**QualitativeInformation**

Our primary exposure tomarket risks relates to interest rate fluctuations on variable rate debt, whichbears interest at the US Prime rate.

The objective of our riskmanagement program is to seek a reduction in the potential negative earningseffects from changes in interest rates. To meet this objective, consistent withpast practices, we intend to vary the proportions of fixed-rate andvariable-rate debt based on our perception of interest rate trends and themarketplace for various debt instruments. We currently do not have anyderivatives.

**QuantitativeInformation**

At December 31, 2005,16.8% of our long-term debt held a variable interest rate (includingoff-balance sheet debt related to the accounts receivable securitizationfacility, the fees on which are variable).

If interest rates increased10%, the expected effect related to variable-rate debt would be to increase netloss for the twelve months ended December 31, 2005 by approximately $1.3million.

For the purpose ofsensitivity analysis, we assumed the same percentage change for all variable-ratedebt and held all factors constant. The sensitivity analysis is limited in thatit is based on balances outstanding at December 31, 2005 and does notprovide for changes in borrowings that may occur in the future.

**ITEM8**                   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

Reference is made to theIndex to the consolidated financial statements and schedule on Page F-1for our consolidated financial statements and notes thereto and supplementaryschedule.

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**ITEM9**                   CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

**ITEM9A**           CONTROLS AND PROCEDURES

The Company has carriedout an evaluation under the supervision and with the participation of Vertis’management, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended). Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that thedesign and operation of these disclosure controls and procedures were effectiveas of December 31, 2005. No significant changes were made in our internalcontrols over financial reporting during the fourth quarter of 2005 thatmaterially affected or are reasonably likely to materially affect our internalcontrols over financial reporting.

**ITEM 9B**          OTHERINFORMATION

None.

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**PARTIII**

**ITEM 10**            DIRECTORSAND EXECUTIVE OFFICERS OF VERTIS

Thefollowing table sets forth certain information regarding the directors andexecutive officers of Vertis.

| Name                     | ** ** | ** ** | ** ** | **Age**                                                                  | ** ** | ** ** | **Positions** | ** ** |
|--------------------------|------------|------------|------------|--------------------------------------------------------------------------|------------|------------|---------------|------------|
| Dean D. Durbin           |       | 53         |       | President and Chief  Executive Officer                                   |
| Stephen E. Tremblay      |       | 46         |       | Chief Financial Officer                                                  |
| David Laverty            |       | 48         |       | Senior Vice President and General  Manager—Advertising Inserts      |
| David P. Colatriano      |       | 43         |       | Senior Vice President and General Manager—Direct  Mail and Premedia |
| John V. Howard, Jr. |       | 44         |       | Chief Legal Officer and  Secretary                                       |
| Ann M. Raider            |       | 58         |       | Chief Strategy Officer                                                   |
| Gary L. Sutula           |       | 61         |       | Chief Information  Officer                                               |
| Donald E. Roland         |       | 63         |       | Non-Executive Chairman  of the Board of Directors                        |
| Ciara A. Burnham         |       | 39         |       | Director                                                                 |
| John T. Dillon           |       | 67         |       | Director                                                                 |
| Anthony J. DiNovi        |       | 43         |       | Director                                                                 |
| Thomas H. Lee       |       | 61         |       | Director                                                                 |
| Soren L. Oberg           |       | 35         |       | Director                                                                 |
| Michael S. Rawlings      |       | 51         |       | Director                                                                 |
| Scott M. Sperling        |       | 48         |       | Director                                                                 |

 

**DeanD. Durbin**was named President and Chief ExecutiveOfficer of Vertis in February 2006. Prior to that he had served asPresident from November of 2004 and had been Chief Financial Officer ofVertis from March 2000 to Feb 2005. Mr. Durbin has also been SeniorVice President and Chief Financial Officer of Treasure Chest AdvertisingCompany, Inc. (“TC Advertising”), one of our former operating units, sinceSeptember 1997. Prior to joining TC Advertising, Mr. Durbin served asVice President and Chief Financial Officer at Thomson Professional Publishing,and served for more than 13 years with the McGraw-Hill Companies, completinghis tenure as Vice President and Group Controller, Construction InformationGroup. He is on the Board of Directors of the Baltimore Museum of Industry.

**StephenE. Tremblay**was named Chief Financial Officer ofVertis in February 2005. From May 2003 to February 2005, heserved as Senior Vice President Finance and Treasurer of Vertis and from May 1998to May 2003 he served as Vice President Finance of Vertis. Prior tojoining Vertis as Group Controller in 1997, Steve held senior financialmanagement positions with Wellman, Inc. and served as a senior manager atErnst & Young.

**DavidLaverty**was named Senior Vice President and GeneralManager of the Advertising Inserts segment of Vertis in April 2005. Priorto that, Mr. Laverty spent 25 years at Revlon Inc. where he held severalsenior-level positions, including Senior Vice President of MaterialsManagement, Senior Vice President of Purchasing and Supply Chain, and VicePresident of Manufacturing Operations for various Revlon facilities.

**DavidP. Colatriano**was named Senior Vice President andGeneral Manager of Direct Mail and Premedia in April 2005. Prior to that,he served as Group President of Vertis North America East since August 2003.From June 2000 to August 2003, Mr. Colatriano served as theGroup President of the former Direct Marketing Services segment of Vertis. Priorto June 2000 he held numerous positions at Webcraft Inc., beginning in January 1987,including Senior Vice President and General Manager, Vice President of 

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Operations and DivisionDirector. Prior to joining Webcraft, David worked as an Industrial Engineerwith the Boeing Company.

**JohnV. Howard, Jr.**was named Chief Legal Officer andSecretary in February 2005. In July 2000, Mr. Howard was namedSenior Vice President3⁄4General Counsel ofVertis. Previously, Mr. Howard was Executive Vice President and GeneralCounsel for Columbine JDS Systems, Inc. and Executive Vice President andGeneral Counsel for Laser Tech Color, Inc. Prior to joining Columbine JDSSystems, Inc. and Laser Tech Color, Mr. Howard was Counsel and ChiefIntellectual Property Counsel for Andersen Worldwide, S.C. in Chicago, theparent entity of Arthur Andersen and Andersen Consulting, in charge of allworldwide intellectual property matters for the Andersen organization. Beforeleaving for Andersen he was Chief Counsel for Quark, Inc., in Denver,developer of Quark XPress, in charge of all worldwide legal matters. Mr. Howardis also a Trustee on the Board of Trustees of the Hammond-Harwood House.

**AnnM. Raider**joined Vertis in April 2005 as ChiefStrategy Officer. Prior to joining Vertis, Ms. Raider served from August 1999to April 2005 as Senior Vice President of Sales and Marketing atSmartSource Direct, a division of News America Marketing. In addition, Ms. Raiderco-founded Consumer Card Marketing, Inc., a loyalty marketing company, andheld senior management positions at Shawmut National Corporation, H.P. Hood,and other corporations. Ms. Raider has also served as a marketingconsultant to such organizations as Staples and Bank One.

**GaryL. Sutula**has been Chief Information Officer since February 2005.Prior to joining Vertis, Mr. Sutula served as Chief Operating Officer andChief Information Officer of gLimit, Inc.; Corporate Senior Vice Presidentand Chief Information Officer at R.R. Donnelley; Vice President and ChiefInformation Officer at Transamerica Financial Services; and Senior VicePresident and Chief Information Officer at American Savings Bank (WashingtonMutual). He is a board member of the Center for Information and TechnologyManagement, Loyola University Chicago, and past President of the Chicagochapter of the Society for Information Management.

**DonaldE. Roland**has served as a director of Vertis andVertis Holdings since June 2000 and was named Chairman of the Board on April 2,2001. He was Chief Executive Officer of Vertis from June 2000 until February 2006.He will continue to serve as non-executive Chairman of the Board of Directors beginningMarch 2006. Prior to June 2000, Mr. Roland was the President beginningin October 1994 and, starting in June 1995, Chief Executive Officerof TC Advertising. Mr. Roland joined TC Advertising in 1983 as Senior VicePresident of Operations and became Executive Vice President in 1993. Prior tojoining TC Advertising, he was at Times Mirror Press, the commercial printingdivision of the Los Angeles Times. In his 17 years at Times Mirror Press, Mr. Rolandheld numerous management positions including Director of Computer Graphics andVice President of Operations. Mr. Roland is on the Board of Directors ofthe University of Maryland, Baltimore Foundation. He is also on the AdvisoryBoard of the School of Continuing and Professional Studies, Center for GraphicCommunications Management & Technology at New York University.

**CiaraA. Burnham**has been a director of Vertis and VertisHoldings since April 2004. Ms. Burnham is a Senior Managing Directorof Evercore Group Holdings, an affiliate of Evercore Partners, an advisory andinvestment firm. Ms. Burnham originally joined the firm in 1997 andrejoined in 2003. From 2001 through 2003, she was a founding partner of FiveMile Capital Partners, a hedge fund management company. Prior to joiningEvercore, she was an equity research analyst with Sanford C. Bernstein &Co., Inc. and previously spent six years in consulting, most recently asan engagement manager at McKinsey & Co., Inc. Ms. Burnham alsoserves on the Board of Specialty Products & Insulation Co.

**JohnT. Dillon**has been a director of Vertis and VertisHoldings since April 2005. In March 2005, Mr. Dillon became ViceChairman of Evercore Capital Partners, a private equity fund, and a SeniorManaging Director of Evercore Partners, an advisory and investment firm.  Prior to that, Mr. Dillon served asChairman and CEO of paper and forest products company International Paper from April 1996until 

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October 2003.  Following his retirement, Mr. Dillonserved, and continues to serve, as a director of Caterpillar Inc., Kellogg Co.and E.I. DuPont de Nemours, and currently sits on the board of two privatelyheld companies.  Mr. Dillon is apast Chairman of the Business Roundtable.

**AnthonyJ. DiNovi**has been a director of Vertis since March 2001and Vertis Holdings since December 1999. Mr. DiNovi has been employedby Thomas H. Lee Partners, L.P. and its predecessor Thomas H. Lee Company since1988 and currently serves as Co-President. Mr. DiNovi is currently aDirector of American Media, Inc., Endurance SpecialtyInsurance, Ltd., Eye Care Centers of America, Inc., Michael Foods, Inc.,Nortek, Inc., US LEC Corporation and various other private corporations.

**ThomasH. Lee**has been a director of Vertis since May 2001and Vertis Holdings since December 1999. Mr. Lee founded Thomas H.Lee Partners, L.P. (formerly the Thomas H. Lee Company) in 1974 and since thattime has served as its President. Mr. Lee serves or has served as aDirector of numerous public and private companies in which the Lee Company andits affiliates have invested, including Finlay Enterprises, Inc., GeneralNutrition Companies, Metris Companies, Inc., Playtex Products, Inc.,Snapple Beverage Corp., The Smith & Wollensky Restaurant Group, Inc.,Wyndham International, Inc., Warner Music Group and New Refco Group Ltd.,LLC. In addition, Mr. Lee is a Member of J.P. Morgan Chase & Co.National Advisory Board.

**SorenL. Oberg**has been a director of Vertis and VertisHoldings since May 2001. Mr. Oberg has been employed by Thomas H. LeePartners, L.P., and its predecessor Thomas H. Lee Company since 1993. From 1992to 1993, Mr. Oberg worked at Morgan Stanley & Co., Inc. inthe Merchant Banking Division. Mr. Oberg also serves on the boards ofAmerican Media, Inc., Cumulus Media Partners, Grupo Corporativo Ono andseveral other private companies.

**MichaelS. Rawlings**has been a director of Vertis and VertisHoldings since January 2003. Mr. Rawlings is also a partner at CICPartners L.P. and a Director of ACE Cash Express, Inc. Prior to that, hewas the President of Pizza Hut, Inc. from 1997 to 2002.

**ScottM. Sperling**has been a director of Vertis since May 2001and Vertis Holdings since December 1999. Mr. Sperling has beenemployed by Thomas H. Lee Partners, L.P. and its predecessor Thomas H. LeeCompany since 1994 and currently serves as Co- President. Mr. Sperling iscurrently a Director of Houghton Mifflin Company, Fisher ScientificInternational, Inc., Wyndham International, Warner Music Group,ProSiebensat.1 Media AG, as well as several private companies.

The term of office of each executive officer is untilthe organizational meeting of our board of directors following the next annualmeeting of our stockholders and until a successor is elected and qualified, oruntil that officer’s death, resignation, retirement, disqualification orremoval.

Each of our directors waselected to hold office until the next annual meeting of our stockholders anduntil his successor is elected and qualified and subject to his death, resignation,retirement, disqualification or removal.

**AuditCommittee and Audit Committee Financial Expert**

The Company hasestablished a separate Audit Committee of the Board of Directors, comprised ofthree of its members: Ciara A. Burnham, Soren L. Oberg and Scott M. Sperling.The Company’s Board of Directors has determined that it does not have an auditcommittee financial expert as defined under the regulations of the Securitiesand Exchange Commission serving on its Audit Committee, and it is not requiredto do so. Our Board of Directors believes that the current members of the Boardof Directors have substantial investment and management experience andsignificant financial expertise, and as a consequence, are fully capable ofdischarging their responsibilities as members of the Company’s Board of 

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Directorsnotwithstanding that no current member of the Audit Committee is an “auditcommittee financial expert” as so defined.

**Code of Ethics**

The Company has adopted acode of ethics that applies to its principal executive officer, principalfinancial officer, principal accounting officer or controller and certain othersenior financial personnel. The code of ethics was filed as Exhibit 14.1to the Annual Report on Form 10-K for the fiscal year ended December 31,2003 and is incorporated by reference in this Annual Report on Form 10-K.There has been no change to the code of ethics from 2003.

**ITEM 11**            EXECUTIVECOMPENSATION

The following table sets forth the compensation paidin respect of the years ended December 31, 2005, 2004 and 2003 to Dean D.Durbin, President and Chief Executive Officer of Vertis and to each of the fourother most highly paid executive officers of Vertis (collectively, the “NamedExecutive Officers”) that were employed by the Company at December 31,2005.

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**SummaryCompensation Table**

|                                                | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long-Term Compensation  Awards** | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------------|------------|-----------------------------------------|------------|------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                              | ** ** | **Other**        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **All** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                              | ** ** | **Annual ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Securities** | ** ** | **Other ** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                              | ** ** | **Compen-**      | ** ** | **Restricted** | ** ** | **Nil Cost** | ** ** | **Underlying** | ** ** | **Compen-** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | **Salary**                   | ** ** | **Bonus**                               | ** ** | **sation**       | ** ** | **Stock Awards** | ** ** | **Options** | ** ** | **Options** | ** ** | **sation** | ** ** |
| **Name and Principal Position** | ** ** | ** ** | ** ** | ** **                   | ** ** | **($)**                                 | ** ** | **($)**          | ** ** | **($)** | ** ** | **($)(1)** | ** ** | **(#) (2)** | ** ** | **(#)(3)** | ** ** | **($)** | ** ** |
| Dean D. Durbin                                 |       |       | 2005       |                         |       | 480,180                                 |       | 200,000          |       |   | 11,880 | (4) |   |   |   |   |   |   |   |   |   |   | 6,300 | (5) |   |
| President and Chief                            |       |       | 2004       |                         |       | 421,587                                 |       |             |       |   | 11,880 | (4) |   |   | 295,035 |   |   |   |   |   |   |   |   |   |   |
| Executive Officer                              |       |       | 2003       |                         |       | 400,000                                 |       |             |       |   | 11,880 | (4) |   |   |   |   |   |   |   |   |   |   | 5,615 | (5) |   |
| Stephen E. Tremblay                            |       |       | 2005       |                         |       | 289,149                                 |       | 100,000          | (6)        |   | 11,880 | (4) |   |   |   |   |   |   |   |   |   |   | 6,021 | (5) |   |
| Chief Financial Officer                        |       |       | 2004       |                         |       | 222,473                                 |       |             |       |   | 11,880 | (4) |   |   | 23,900 |   |   |   |   |   |   |   |   |   |   |
|                                           |       |       | 2003       |                         |       | 205,750                                 |       |             |       |   | 11,945 | (4) |   |   |   |   |   |   |   |   |   |   | 5,171 | (5) |   |
| David P. Colatriano                            |       |       | 2005       |                         |       | 300,000                                 |       |             |       |   | 11,880 | (4) |   |   |   |   |   |   |   |   |   |   | 17,095 | (7) |   |
| Senior Vice President and                      |       |       | 2004       |                         |       | 333,082                                 |       |             |       |   | 11,880 | (4) |   |   | 136,868 |   |   |   |   |   |   |   | 8,971 | (7) |   |
| General Manager—Direct                    |       |       | 2003       |                         |       | 298,071                                 |       |             |       |   | 11,880 | (4) |   |   |   |   |   |   |   |   |   |   | 3,600 | (5) |   |
| Marketing and Premedia                         |       |       |       |                         |       |                                    |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| John V. Howard, Jr.                            |       |       | 2005       |                         |       | 284,760                                 |       | 100,000          | (6)        |   | 11,880 | (4) |   |   |   |   |   |   |   |   |   |   | 5,695 | (5) |   |
| Chief Legal Officer and                        |       |       | 2004       |                         |       | 273,000                                 |       |             |       |   | 11,880 | (4) |   |   | 135,373 |   |   |   |   |   |   |   |   |   |   |
| Secretary                                      |       |       | 2003       |                         |       | 273,000                                 |       |             |       |   | 11,880 | (4) |   |   |   |   |   |   |   |   |   |   | 6,000 | (5) |   |
| Donald E. Roland                               |       |       | 2005       |                         |       | 650,000                                 |       |             |       |   | 24,000 | (4) |   |   |   |   |   |   |   |   |   |   | 6,000 | (5) |   |
| Non-Executive Chairman                         |       |       | 2004       |                         |       | 650,000                                 |       |             |       |   | 24,000 | (4) |   |   | 1,130,025 |   |   |   |   |   |   |   |   |   |   |
| and Former Chief Executive                     |       |       | 2003       |                         |       | 650,000                                 |       |             |       |   | 24,000 | (4) |   |   |   |   |   |   |   |   |   |   | 5,375 | (5) |   |
| Officer (8)                                    |       |       |       |                         |       |                                    |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |            |            |            |                              |            |                                         |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             Restricted shares were issued in June 2004pursuant to an offer made to eligible employees to exchange outstandingeligible stock options for restricted common stock on a 4 for 1 basis.Additionally, restricted shares are issued to certain employees throughout theyear under various other agreements. See “Employment Arrangements withExecutive Officers” for further discussion. Restricted stock awards are valuedusing an estimate of $20.48, which is based on a range of values determined byan independent valuation. The restricted shares will vest immediately prior toa liquidity event, generally defined as a public offering of our common stock(where immediately following such offering, the aggregate number of shares ofcommon stock held by the public, not including affiliates of the Company,represents at least 20% of the total number of outstanding shares), merger orother business combination, or a sale or other disposition of all orsubstantially all of our assets to another entity for cash and/or publiclytraded securities. Additionally, the restricted shares will vest upon the deathor disability of the Named Executive Officer while employed by the Company. Althoughnot reflected in the table above, restricted shares valued at$2.0 million, $0.9 million, $0.6 million and $0.6 millionwere granted to Messrs. Durbin, Tremblay, Colatriano and Howard onMarch 6, 2006, respectively.

(2)             Nil cost options were granted in July 2004pursuant to an offer made to eligible U.K. employees to exchange outstandingeligible stock options for nil cost options on a 4 for 1 basis. These Nil CostOptions were cancelled in the fourth quarter of 2005 in conjunction with thesale of the two divisions comprising the Vertis Europe segment (see Note 2 toour consolidated financial statements).

(3)             All stock option grants were made pursuantto the Vertis Holdings, Inc. 1999 Equity Award Plan (the “Stock Plan”) andare described below under “Employment Arrangements with Executive Officers”. Asshown above, there were no options granted in 2005, 2004 or 2003.

(4)             Represents an auto allowance.

(5)             Represents amounts contributed to 401(k) planfor the Named Executive Officer.

(6)             The Company’s Board of Directorsauthorized the payment of these bonuses in February 2006 in recognition ofprior performance efforts by Mr. Tremblay and Mr. Howard.

(7)             In 2005, includes $4,346 for amountscontributed to 401(k) plan for Mr. Colatriano as well as $12,749 paidto Mr. Colatriano under the Company’s deferred compensation plan. In 2004,includes $8,971 for amounts paid to Mr. Colatriano under the Company’sdeferred compensation plan.

(8)             Mr. Roland transitioned from hisposition as Chief Executive Officer of Vertis to Non-Executive Chairman ofVertis in February 2006.

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**Option Values at End of Fiscal 2005**

In 2004, the Company extended an offer to all eligibleU.S.-based employees holding options under the Stock Plan the opportunity toexchange their outstanding eligible options for restricted common stock on a 4for 1 basis. Additionally, in 2004 the Company extended an offer to alleligible U.K.-based employees holding options under the Stock Plan theopportunity to exchange their outstanding eligible options for Nil Cost Optionson a 4 for 1 basis.  All Named ExecutiveOfficers holding stock options participated in the exchange offers andexchanged their options for either restricted stock or nil cost options asapplicable. See “Employment Arrangements with Executive Officers” for furtherdiscussion. Thus, there are no options held by any of the named officers at December 31,2005. No stock appreciation rights have been granted to any of the NamedExecutive Officers.

**SupplementalExecutive Retirement Plan**

The following table setsforth annual amounts payable to Messrs. Durbin, Tremblay, Colatriano, andHoward upon their retirement under Vertis Holdings and SubsidiariesSupplemental Executive Retirement Plan (the “SERP”).

**Pension Plan Table**

| ** **          | ** ** | **Years of Service** | ** ** |
|---------------------|------------|--------------------------------|------------|
| **Remuneration**    | ** ** | ** **                     | ** ** | **____5___** | ** ** | **___10___** | ** ** | **____15___** | ** ** | **____20___** | ** ** | **____25____** | ** ** | **____30___** | ** ** |
| $150,000            |       | $                              | 7,500      |   | $ | 15,000 |   | $ | 22,000 |   | $ | 30,000 |   |   | $ | 37,500 |   |   | $ | 45,000 |   |
|   175,000 |       | 8,750                          |       | 17,500 |   | 26,500 |   | 35,000 |   |   | 43,750 |   |   | 52,500 |   |
|   200,000 |       | 10,000                         |       | 20,000 |   | 30,000 |   | 40,000 |   |   | 50,000 |   |   | 60,000 |   |
|   225,000 |       | 11,250                         |       | 22,500 |   | 33,750 |   | 45,000 |   |   | 56,250 |   |   | 67,500 |   |
|   250,000 |       | 12,500                         |       | 25,000 |   | 37,500 |   | 50,000 |   |   | 62,500 |   |   | 75,000 |   |
|   275,000 |       | 13,750                         |       | 27,500 |   | 41,250 |   | 55,000 |   |   | 68,750 |   |   | 82,500 |   |
|   300,000 |       | 15,000                         |       | 30,000 |   | 45,000 |   | 60,000 |   |   | 75,000 |   |   | 90,000 |   |
|   500,000 |       | 25,000                         |       | 50,000 |   | 75,000 |   | 100,000 |   |   | 125,000 |   |   | 150,000 |   |
|   600,000 |       | 30,000                         |       | 60,000 |   | 90,000 |   | 120,000 |   |   | 150,000 |   |   | 180,000 |   |
|   700,000 |       | 35,000                         |       | 70,000 |   | 105,000 |   | 140,000 |   |   | 175,000 |   |   | 210,000 |   |
|   800,000 |       | 40,000                         |       | 80,000 |   | 120,000 |   | 160,000 |   |   | 200,000 |   |   | 240,000 |   |
|   900,000 |       | 45,000                         |       | 90,000 |   | 135,000 |   | 180,000 |   |   | 225,000 |   |   | 270,000 |   |
|                     |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The compensation coveredby the SERP includes each of the participant’s entire annual base salary.Messrs. Durbin, Tremblay, Colatriano, and Howard currently have 8, 9, 19,and 8 years of service, respectively. See “Employment Arrangements withExecutive Officers” below. Benefits under the SERP are computed by multiplyingthe participant’s average salary for the last five years prior to retirement bya percentage equal to one percent for each year of service up to a maximum of30 years. Benefits under the SERP are not subject to a deduction for SocialSecurity. Benefits under the SERP are subject to an offset for amounts paid toparticipants under the Retirement Income Plan as of June 30, 2002 and formatching contributions under the Vertis 401(k) plan.

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**Compensationof Directors**

Donald E. Roland, theChief Executive Officer of Vertis at December 31, 2005, did not receiveany additional compensation for service as a member of the Board of Directorsof Vertis (the “Board”). At December 31, 2005, Mr. Roland was theonly director of Vertis who was also an executive officer of Vertis. InFebruary 2006, Mr. Roland transitioned from the position of ChiefExecutive Officer to Non-Executive Chairman of the Board. For informationrelating to compensation of Mr. Roland, see “Employment Arrangements withExecutive Officers” below.

All other directors ofVertis (each a “non-employee director”), except Mr. Rawlings, are directlyaffiliated with either Thomas H. Lee Partners (“THL”) or Evercore CapitalPartners (“ECP”), two significant shareholders of Vertis Holdings. Mr. Rawlingswas appointed to the Board upon the nomination of THL and ECP pursuant to theAmended and Restated Investors’ Agreement among Vertis Holdings, THL, ECP andothers, dated March 23, 2001. With the exception of Mr. Rawlings, asdiscussed below, none of the non-employee directors individually receive anycompensation from Vertis for serving on the Board. Vertis, however, enteredinto consulting agreements with Thomas H. Lee Capital, LLC (an affiliate ofTHL), THL Equity Advisors IV, LLC (an affiliate of THL) and Evercore AdvisorInc. (an affiliate of ECP), pursuant to which Vertis pays annual fees to theseparties in amounts of approximately $220,000, $780,000 and $250,000. See“Certain Relationships and Related Transactions.”

Mr. Rawlingsreceives the following annual compensation for his service:

·  $50,000 for service onthe Board,

·  $50,000 for businessconsulting services, and

·  up to 7,500 shares ofrestricted stock over a three-year period, subject to the plan’s provisions.

**EmploymentArrangements with Executive Officers**

***Roland Employment Agreement.***   TheCompany has entered into an employment agreement with Donald E. Roland,effective August 31, 2003 (the “Roland Agreement”), pursuant to which Mr. Rolandcurrently serves as Chairman and Chief Executive Officer until February 2006.Mr. Roland and Vertis are currently finalizing a transition agreement thatwill replace the Roland Agreement and will contain mutually agreed upon termsand conditions that reflect Mr. Roland’s transition from Chairman andChief Executive Officer to Non-Executive Chairman. Until the transitionagreement is executed, the Roland Agreement remains in full force and effect. TheRoland Agreement may be terminated by either Mr. Roland or the Company atany time for any reason. Under the Roland Agreement, Mr. Roland receivesan annual base salary, as adjusted by the board of directors, and variousemployment benefits. In 2005, Mr. Roland received a base salary of$650,000. The Roland Agreement also provides that Mr. Roland receive anannual bonus targeted at not less than 75% of base salary (assuming bonustargets under the Company’s Executive Incentive Plan (the “EIP”), which arebased upon the percentages of the achievements of an internally calculated proforma EBITDA measure, are met) and which can rise to 200% of the target incentiveif the Company exceeds its goals, and certain fringe benefits, includingparticipation in the SERP. The Company has entered into a Restricted StockAgreement with Mr. Roland, effective May 20, 2004, pursuant to which Mr. Rolandexchanged certain options to purchase shares of the common stock of the Companyfor 55,177 restricted shares of common stock of Vertis Holdings.

***Durbin Employment Agreement.***   TheCompany has entered into an employment agreement with Dean D. Durbin, effectiveAugust 30, 2003, which was amended by the parties on March 9, 2006(the “Durbin Amendment”) (collectively, the “Durbin Agreement”). The DurbinAmendment changed Mr. Durbin’s position to President and Chief ExecutiveOfficer of Vertis and adjusted his annual base salary to $570,000. The DurbinAgreement may be terminated by either Mr. Durbin or the Company at any timefor any reason. Under the Durbin Agreement, Mr. Durbin receives an annualbase salary, as adjusted by the board of directors, and various employmentbenefits. In 2005, Mr. Durbin received a base salary of $480,180. TheDurbin Agreement also provides that Mr. Durbin receive an annual bonustargeted at not less than 75% of 

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base salary(assuming bonus targets under the EIP, which are based upon the percentages ofthe achievements of an internally calculated pro forma EBITDA measure, are met)and which can rise to 200% of the target incentive if the Company exceeds itsgoals, and certain fringe benefits, including participation in the SERP. On November 12,2004, the Company amended the Durbin Agreement to provide that Mr. Durbinwill be eligible, at the discretion of the Board of Directors, for a specialbonus not to exceed $200,000 based upon his performance and payable at thediscretion of the Board of Directors within 2005 (“Durbin Special Bonus”). TheDurbin Special Bonus shall not be includable in any change of control or otherseverance calculations within the Durbin Employment Agreement. The Company hasentered into a Restricted Stock Agreement with Mr. Durbin, effective May 20,2004, pursuant to which Mr. Durbin exchanged certain options to purchaseshares of the common stock of the Company for 14,406 restricted shares ofcommon stock of Vertis Holdings.

***Colatriano Employment Agreement.***   TheCompany has entered into an employment agreement with Dave Colatriano,effective August 15, 2003 (the “Colatriano Agreement”), pursuant to which Mr. Colatrianocurrently serves as Senior Vice President and General Manager for Direct Mailand Premedia. The Colatriano Agreement may be terminated by either Mr. Colatrianoor the Company at any time for any reason. Under the Colatriano Agreement, Mr. Colatrianoreceives an annual base salary, as adjusted by the board of directors, andvarious employment benefits. In 2005, Mr. Colatriano received a basesalary of $300,000. The Colatriano Agreement also provides that Mr. Colatrianoreceive a signing bonus of $50,000. The Colatriano Agreement also provides anannual bonus targeted at 50% of his base salary (assuming bonus targets underthe EIP, which are based upon the percentages of the achievements of aninternally calculated pro forma EBITDA measure, are met) and which can rise to200% of the target incentive if the Company exceeds its goals, and certainfringe benefits, including participation in the SERP. As part of the ColatrianoAgreement, Mr. Colatriano also received a grant of 5,000 restricted sharesof common stock of Vertis Holdings.

***Howard Employment Agreement.***   TheCompany has entered into an employment agreement with John Howard, effective August 31,2003 (as amended to date, the “Howard Agreement”), pursuant to which Mr. Howardcurrently serves as Chief Legal Officer and Secretary. The Howard Agreement maybe terminated by either Mr. Howard or the Company at any time for anyreason. Under the Howard Agreement, Mr. Howard receives an annual basesalary, as adjusted by the board of directors, and various employment benefits.In 2005, Mr. Howard received a base salary of $284,760. The HowardAgreement also provides that Mr. Howard receive an annual bonus targetedat not less than 75% of base salary (assuming bonus targets under the EIP,which are based upon the percentages of the achievements of an internallycalculated pro forma EBITDA measure, are met) and which can rise to 200% of thetarget incentive if the Company exceeds its goals, and certain fringe benefits,including participation in the SERP.

***Severance Arrangements with Certain ExecutiveOfficers.***   The employment agreements of, DeanD. Durbin,  John V. Howard, Jr., andDonald E. Roland, described above, contain provisions regarding executive severancearrangements (the “Severance Arrangements”), with each of these executiveofficers. Pursuant to the Severance Arrangements, if an executive officer’semployment is terminated by the Company without “cause” or by the executiveofficer for “good reason” following a “change in control” of the Company, theexecutive officer will receive a lump sum amount equal to three times the sumof (x) the executive officer’s annual base salary in effect immediatelyprior to the date of termination and (y) the greater of the target bonusfor the executive officer under the EIP in the year immediately preceding thatin which the termination occurs and the annual bonus the executive officerwould have earned for the fiscal year in which the date of termination occursabsent such termination. In addition, (i) the executive officer willreceive a lump sum payment equal to the sum of any awarded but unpaidcompensation under the EIP and a pro rata portion to the date of the executiveofficer’s termination of the aggregate value of all contingent incentivecompensation awards to the executive officer for all uncompleted periods underthe EIP calculated based on actual performance achieved for the fiscal yearthrough the date of termination, (ii) all outstanding stock incentiveawards (including stock options) other than options that vest upon 

43

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attainment ofperformance goals will immediately vest and remain exercisable until upon thedate of termination and shall remain exercisable in accordance with the termsof the option grant; and (iii) the executive officer and his or hereligible dependents will be entitled to one year of continued medical, dental,prescription and vision care insurance coverages (the “Continued Coverage”),except that Mr. Roland is entitled to receive 18 months of the ContinuedCoverage.

If anexecutive officer leaves the Company absent a change of control of the Company,the Severance Arrangements provide the following payments and benefits:

·       ifthe executive officer’s employment is terminated upon his or her death ordisability, the Company will pay to the executive officer or his or her estatea lump sum equal to earned annual base salary and earned annual bonus forcompleted fiscal years. In addition, the Company will provide the executiveofficer or his or her eligible dependents six months of the Continued Coverage(except that Mr. Roland and his eligible dependents will receive twelvemonths of the Continued Coverage) and each such executive officer will then beentitled to elect continuation coverage in accordance with the Internal RevenueCode of 1986 (the “COBRA coverage”);

·       ifthe Company terminates the executive officer’s employment for cause or theexecutive officer resigns other than for good reason, the Company will pay tothe executive officer a lump sum equal to his annual base salary earned throughthe date of termination that has not been paid and earned annual bonus prior tothe date of termination; and

·       ifthe Company terminates the executive officer’s employment other than for cause,death or disability, or the executive officer terminates for good reason, inaddition to the payment of any unpaid amounts of the executive officer’s earnedannual base salary and earned annual bonus for completed fiscal years, theCompany will also pay:

·        toMessrs. Durbin and Roland, a cash payment equal to two times the sum (the “BaseSum”) of (a) the respective executive officer’s annual base salary and (b) thegreater of (x) the annual bonus earned by the respective executive officerfor the last completed fiscal year prior to the fiscal year in which thetermination occurs and (y) the annual bonus the respective executiveofficer would have earned for the fiscal year in which the termination occurs;and

·        toMr. Howard, a cash payment equal to 1.5 times the Base Sum;

Also, the Company will (i) providethe executive officer or his or her eligible dependents six months of theContinued Coverage (except that Mr. Roland and his eligible dependentswill receive twelve months of the Continued Coverage) and each such executiveofficer will then be eligible for COBRA coverage, and (ii) credit theexecutive officer with an additional year of vesting for purposes of theexecutive officer’s then outstanding options, which will remain exercisable inaccordance with the terms of the applicable option grants and equity plan.

The employment agreements of David P. Colatriano andthe severance agreement of Stephen E. Tremblay contain provisions regardingseverance arrangements. For Mr. Colatriano, if his employment isterminated by the Company without “cause” or if the Company requires that he bebased at a location which is more than fifty miles from the office at which heis based at the time of the relocation, he will receive severance pay, in theform of payroll continuation of his annual base salary as of his date ofseparation for a period of twelve months. If he remains unemployed at the endof those payments, he is eligible for a continuation of the severance pay foreach month in which he remains unemployed up to a maximum of six months. For Mr.Tremblay, if his employment is terminated by the Company without “cause”, hewill receive severance pay, in the form of payroll continuation of his annualbase salary as of his date of separation for a period of twelve months.

**CompensationCommittee Interlocks and Insider Participation**

TheCompany does not have a compensation committee. Donald Ronald, former ChiefExecutive Officer of the Company, serves as the Non-Executive Chairman of theBoard and participates in deliberations with the Board of Directors regardingcompensation of executive officers.

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**ITEM12**            SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Vertis is a wholly-ownedsubsidiary of Vertis Holdings.

The following table setsforth certain information regarding the beneficial ownership of Vertis Holdings’common stock as of March 6, 2006 for (i) each stockholder who isknown by us to beneficially own more than 5% of Vertis Holdings common stock, (ii) eachdirector and executive officer of Vertis and Vertis Holdings, and (iii) allof the directors and executive officers of Vertis and Vertis Holdings as agroup.

|                                                                   | ** ** | **Shares Beneficially Owned** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Name and Address of Beneficial Owner** | ** ** | ** **                              | ** ** | **Amount and Nature of   Ownership(1)** | ** ** | **Percentage of   Class** | ** ** |
| Thomas H. Lee Partners L.P.  and Affiliates(2)                    |       |                                    | 8,844,938  |   |   |   | 64.4 | % |   |
| c/o Thomas H. Lee Partners,  L.P.,                                |       |                                    |       |   |   |   |   |   |   |
| 75 State Street,                                                  |       |                                    |       |   |   |   |   |   |   |
| Boston, MA 02109                                                  |       |                                    |       |   |   |   |   |   |   |
| Evercore Capital Partners L.P. and Affiliates(3)                  |       |                                    | 2,114,415  |   |   |   | 15.4 | % |   |
| 65 East 55th  Street, 33rd Floor,                                 |       |                                    |       |   |   |   |   |   |   |
| New York, NY  10022                                               |       |                                    |       |   |   |   |   |   |   |
| Dean D. Durbin(4)                                                 |       |                                    | 119,615    |   |   |   | * |   |   |
| c/o Vertis, Inc.,                                            |       |                                    |       |   |   |   |   |   |   |
| 250 West Pratt Street,                                            |       |                                    |       |   |   |   |   |   |   |
| Baltimore, MD 21201                                               |       |                                    |       |   |   |   |   |   |   |
| Stephen E. Tremblay                                               |       |                                    | 43,443     |   |   |   | * |   |   |
| c/o  Vertis, Inc.,                                           |       |                                    |       |   |   |   |   |   |   |
| 250 West Pratt  Street,                                           |       |                                    |       |   |   |   |   |   |   |
| Baltimore, MD  21201                                              |       |                                    |       |   |   |   |   |   |   |
| David Laverty                                                     |       |                                    | 35,000     |   |   |   | * |   |   |
| c/o Vertis, Inc.,                                            |       |                                    |       |   |   |   |   |   |   |
| 250 West Pratt Street,                                            |       |                                    |       |   |   |   |   |   |   |
| Baltimore, MD 21201                                               |       |                                    |       |   |   |   |   |   |   |
| David P. Colatriano(5)                                            |       |                                    | 39,018     |   |   |   | * |   |   |
| c/o  Vertis, Inc.,                                           |       |                                    |       |   |   |   |   |   |   |
| 250 West Pratt  Street,                                           |       |                                    |       |   |   |   |   |   |   |
| Baltimore, MD  21201                                              |       |                                    |       |   |   |   |   |   |   |
| John V. Howard, Jr.                                          |       |                                    | 36,610     |   |   |   | * |   |   |
| c/o Vertis, Inc.,                                            |       |                                    |       |   |   |   |   |   |   |
| 250 West Pratt Street,                                            |       |                                    |       |   |   |   |   |   |   |
| Baltimore, MD 21201                                               |       |                                    |       |   |   |   |   |   |   |
| Ann M. Raider                                                     |       |                                    | 13,267     |   |   |   | * |   |   |
| c/o  Vertis, Inc.,                                           |       |                                    |       |   |   |   |   |   |   |
| 250 West Pratt Street,                                            |       |                                    |       |   |   |   |   |   |   |
| Baltimore, MD  21201                                              |       |                                    |       |   |   |   |   |   |   |
| Gary L. Sutula                                                    |       |                                    | 25,668     |   |   |   | * |   |   |
| c/o Vertis, Inc.,                                            |       |                                    |       |   |   |   |   |   |   |
| 250 West Pratt Street,                                            |       |                                    |       |   |   |   |   |   |   |
| Baltimore, MD 21201                                               |       |                                    |       |   |   |   |   |   |   |
|                                                                   |            |                                         |            |  |  |  |  |  |  |  |  |

45

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| Donald E. Roland(6)                                                                                   |   |   | 127,646   |   |   |   | *      |   |   |
|-------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|--------|--------|--------|
| c/o Vertis, Inc.,                                                                                |   |   |      |   |   |   |   |   |   |
| 250 West Pratt Street,                                                                                |   |   |      |   |   |   |   |   |   |
| Baltimore, MD 21201                                                                                   |   |   |      |   |   |   |   |   |   |
| Thomas H. Lee(7)                                                                                      |   |   | 7,262,155 |   |   |   | 52.9   | %      |   |
| c/o THL Partners,                                                                                     |   |   |      |   |   |   |   |   |   |
| 75 State Street,                                                                                      |   |   |      |   |   |   |   |   |   |
| Boston, MA 02109                                                                                      |   |   |      |   |   |   |   |   |   |
| Anthony J. DiNovi(8)                                                                                  |   |   | 7,166,451 |   |   |   | 52.2   | %      |   |
| c/o THL Partners,                                                                                     |   |   |      |   |   |   |   |   |   |
| 75 State Street,                                                                                      |   |   |      |   |   |   |   |   |   |
| Boston, MA 02109                                                                                      |   |   |      |   |   |   |   |   |   |
| Scott M. Sperling(9)                                                                                  |   |   | 7,166,451 |   |   |   | 52.2   | %      |   |
| c/o THL Partners,                                                                                     |   |   |      |   |   |   |   |   |   |
| 75 State Street,                                                                                      |   |   |      |   |   |   |   |   |   |
| Boston, MA 02109                                                                                      |   |   |      |   |   |   |   |   |   |
| Soren L. Oberg(10)                                                                                    |   |   | 7,146,253 |   |   |   | 52.0   | %      |   |
| c/o THL Partners,                                                                                     |   |   |      |   |   |   |   |   |   |
| 75 State Street,                                                                                      |   |   |      |   |   |   |   |   |   |
| Boston, MA 02109                                                                                      |   |   |      |   |   |   |   |   |   |
| Ciara A. Burnham(11)                                                                                  |   |   | 2,114,415 |   |   |   | 15.4   | %      |   |
| c/o Evercore  Capital Partners,                                                                       |   |   |      |   |   |   |   |   |   |
| 55 East 52nd  Street, 43rd Floor,                                                                     |   |   |      |   |   |   |   |   |   |
| New York, NY  10055                                                                              |   |   |      |   |   |   |   |   |   |
| John T. Dillon(12)                                                                                    |   |   | 2,114,415 |   |   |   | 15.4   | %      |   |
| c/o Evercore Capital  Partners,                                                                       |   |   |      |   |   |   |   |   |   |
| 55 East 52nd Street, 43rd Floor,                                                                      |   |   |      |   |   |   |   |   |   |
| New York, NY 10055                                                                               |   |   |      |   |   |   |   |   |   |
| Michael Rawlings (13)                                                                                 |   |   | 5,000     |   |   |   | *      |   |   |
| c/o CIC Partners  LP,                                                                                 |   |   |      |   |   |   |   |   |   |
| 500 Crescent Ct,  Suite 250,                                                                     |   |   |      |   |   |   |   |   |   |
| Dallas, TX 75201                                                                                      |   |   |      |   |   |   |   |   |   |
| All Directors and Executive  Officers of Vertis and Vertis Holdings  as a group (16 persons)(14) |   |   | 605,935   |   |   |   | 4.41   | %      |   |

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*                    Less than onepercent.

(1)          This column includesshares which directors and executive officers of Vertis have the right toacquire within 60 days. This column also includes shares of the Company’srestricted stock that vest immediately prior to a liquidity event, generallydefined as a public offering of the Company’s common stock (where immediatelyfollowing such offering, the aggregate number of shares of common stock held bythe public, not including affiliates of the Company, represents at least 20% ofthe total number of outstanding shares), merger or other business combination,or a sale or other disposition of all or substantially all of our assets toanother entity for cash and/or publicly traded 

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securities (“LiquidityEvent”). Except as otherwise indicated, each person and entity has sole votingand dispositive power with respect to the shares set forth in the table.

(2)          Includes 6,135,560shares of common stock and warrants to purchase 177,906 shares of common stockheld by Thomas H. Lee Equity Fund IV, L.P. (“Fund IV”); 212,097 shares ofcommon stock and warrants to purchase 6,149 shares of common stock held by ThomasH. Lee Foreign Fund IV, L.P. (“Foreign IV”); 595,905 shares of common stock andwarrants to purchase 17,278 shares of common stock held by Thomas H. LeeForeign Fund IV-B, L.P. (“Foreign IV-B”); 1,032 shares of common stock andwarrants to purchase 30 shares of common stock held by Thomas H. Lee InvestorsLimited Partnership (“THLILP”); and 399,727 shares of common stock and warrantsto purchase 11,585 shares of common stock held by other affiliates of Thomas H.Lee Partners, L.P. Also includes 1,248,295 shares of common stock and warrantsto purchase 39,374 shares of common stock held by CLI/THLEF IV Vertis LLC (“CLI/THLEF”).

(3)          Includes 925,225 sharesof common stock held by Evercore Capital Partners L.P. (“Evercore Capital”);222,199 shares of common stock held by Evercore Capital Partners (NQ) L.P. (“EvercoreCapital NQ”); and 966,991 shares of common stock controlled by EBF Group LLC (“EBF”),which include 243,936 shares of common stock held by Evercore Capital OffshorePartners L.P., 30,262 shares of common stock held by Evercore Co-InvestmentPartnership L.P., 277,117 shares of common stock held by Aetna Life InsuranceCompany and 415,676 shares of common stock held by Capital CommunicationsCDPQ Inc.

(4)          Includes rightsentitling Mr. Durbin to 6,002 shares of common stock upon the occurrenceof certain sales or liquidation of Vertis Holdings and 113,613 shares ofrestricted stock that vest immediately prior to a Liquidity Event.

(5)          Includes rightsentitling Mr. Colatriano to 2,335 shares of common stock upon theoccurrence of certain sales or liquidation of Vertis Holdings and 36,683 sharesof restricted stock that vest immediately prior to a Liquidity Event.

(6)          Includes 52,003 sharesof common stock, rights entitling Mr. Roland to 20,466 shares of commonstock upon the occurrence of certain sales or liquidation of Vertis Holdingsand 55,177 shares of restricted stock that vest immediately prior to aLiquidity Event.

(7)          Director of VertisHoldings and Vertis; includes 96,495 shares of common stock and warrants topurchase 2,795 shares of common stock which are currently exercisable and owneddirectly by Mr. Lee; 16,391 shares of common stock and warrants topurchase 517 shares of common stock held by CLI/THLEF, which represent Mr. Lee’spro rata ownership of those entities. Also includes the 6,135,560 shares ofcommon stock and warrants to purchase 177,906 shares of common stock held byFund IV; 212,097 shares of common stock and warrants to purchase 6,149 sharesof common stock held by Foreign IV; 595,905 shares of common stock and warrantsto purchase 17,278 shares of common stock held by Foreign IV-B; and 1,032shares of common stock and warrants to purchase 30 shares of common stock heldby THLILP. Mr. Lee disclaims beneficial ownership of the shares held byFund IV, Foreign IV, Foreign IV-B and THLILP except to the extent of hispecuniary interest therein.

(8)          Director of VertisHoldings and Vertis; includes 17,899 shares of common stock and warrants topurchase 519 shares of common stock which are currently exercisable and owneddirectly by Mr. DiNovi; and 3,042 shares of common stock and warrants topurchase 96 shares of common stock held by CLI/THLEF, which represent Mr. DiNovi’spro rata ownership of those entities. Also includes the 6,135,560 shares ofcommon stock and warrants to purchase 177,906 shares of common stock held byFund IV; 212,097 shares of common stock and warrants to purchase 6,149 sharesof common stock held by Foreign IV; and 595,905 shares of common stock and warrantsto purchase 17,278 shares of 

47

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common stock held byForeign IV-B. Mr. DiNovi disclaims beneficial ownership of the shares heldby Fund IV, Foreign IV, and Foreign IV-B except to the extent of his pecuniaryinterest therein.

(9)          Director of Vertis Holdingsand Vertis; includes 17,899 shares of common stock and warrants to purchase 519shares of common stock which are currently exercisable and owned directly by Mr. Sperling;3,042 shares of common stock and warrants to purchase 96 shares of common stockheld by CLI/THLEF, which represent Mr. Sperling’s pro rata ownership ofthose entities. Also includes the 6,135,560 shares of common stock and warrantsto purchase 177,906 shares of common stock held by Fund IV; 212,097 shares ofcommon stock and warrants to purchase 6,149 shares of common stock held byForeign IV; and 595,905 shares of common stock and warrants to purchase 17,278shares of common stock held by Foreign IV-B. Mr. Sperling disclaimsbeneficial ownership of the shares held by Fund IV, Foreign IV, and ForeignIV-B except to the extent of his pecuniary interest therein.

(10)   Director of Vertis Holdings andVertis; includes 1,127 shares of common stock and warrants to purchase 33shares of common stock which are currently exercisable and owned directly by Mr. Oberg;192 shares of common stock and warrants to purchase 6 shares of common stockheld by CLI/THLEF, which represent Mr. Oberg’s pro rata ownership of thoseentities. Also includes the 6,135,560 shares of common stock and warrants topurchase 177,906 shares of common stock held by Fund IV; 212,097 shares ofcommon stock and warrants to purchase 6,149 shares of common stock held byForeign IV; and 595,905 shares of common stock and warrants to purchase 17,278shares of common stock held by Foreign IV-B. Mr. Oberg disclaimsbeneficial ownership of the shares held by Fund IV, Foreign IV and Foreign IV-Bexcept to the extent of his pecuniary interest therein.

(11)   Director of Vertis Holding andVertis; includes beneficially owned shares in the amount of 925,225 shares ofcommon stock held by Evercore Capital; 222,199 shares of common stock held byEvercore Capital NQ; and 966,991 shares of common stock controlled by EBF. Ms. Burnhamdisclaims beneficial ownership of the shares held by Evercore Capital, EvercoreCapital NQ and EBF except to the extent of her pecuniary interest therein.

(12)   Director of Vertis Holding andVertis; includes beneficially owned shares in the amount of 925,225 shares ofcommon stock held by Evercore Capital; 222,199 shares of common stock held byEvercore Capital NQ; and 966,991 shares of common stock controlled by EBF. Mr. Dillondisclaims beneficial ownership of the shares held by Evercore Capital, EvercoreCapital NQ and EBF except to the extent of his pecuniary interest therein.

(13)   Director of Vertis Holding andVertis; includes 5,000 shares of restricted stock that vest immediately priorto a Liquidity Event.

(14)   Includes208,090 shares of common stock; rights to 28,803 shares of common stock uponthe occurrence of certain sales or liquidation of Vertis Holdings, warrants topurchase 4,581 shares of common stock; and 364,461 shares of restricted stockthat vest immediately prior to a Liquidity event.

**ITEM 13    CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

On December 7, 1999, we entered into consultingagreements commencing January 1, 2000 with each of Thomas H. LeeCapital, LLC (an affiliate of Thomas H. Lee Equity Fund IV, LP, asignificant stockholder of Vertis Holdings), THL Equity Advisors IV, LLC (anaffiliate of Thomas H. Lee Equity Fund IV, LP), and Evercore Advisors Inc.(an affiliate of Evercore Capital Partners, LP, a significant stockholder ofVertis Holdings). Under each agreement, these parties have agreed to provide uswith consulting services on matters involving corporate finance, strategiccorporate planning and other management skills and services. The annual feespayable to these parties under these agreements amount to approximately$220,000, $780,000 and $250,000, respectively. Unless otherwise agreed, theconsulting agreements with Thomas H. Lee Capital, LLC and THL EquityAdvisors IV, LLC expire when certain 

48

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persons affiliated withTHL cease to own at least one third of the number of Vertis Holdings commonshares they collectively held immediately after December 7, 1999. Theconsulting agreement with Evercore Advisors Inc. expires when Evercore CapitalPartners, LP and certain of its affiliates cease to own at least one third ofthe number of Vertis Holdings common shares they collectively held immediatelyafter December 7, 1999. Among our directors of the board, Messrs. DiNovi, Lee, Oberg and Sperling are affiliated with THL and Ms. Burnham and Mr. Dillonare affiliated with ECP. See “Management”.

On December 7, 1999, Vertis Holdings issued tocertain of its equity investors $100.0 million aggregate principal amountof 12.0% mezzanine notes as part of a unit including warrants to purchasecommon stock of Vertis Holdings at the time of Vertis Holdings’recapitalization. Effective with the closing of the Credit Facility in December 2004,interest will continue to be 13% payable in-kind unless certain conditions setforth in the credit agreement are met. In addition, the bond indentures includecovenants that restrict payments from the Company to Vertis Holdings.

In connection with the recapitalization of VertisHoldings in 1999 and 2000, 44 of our employees, including Messrs. Durbinand Howard among the Named Executive Officers, were granted the option topurchase shares of Vertis Holdings and to finance such purchase through signingfull-recourse loans with Vertis Holdings. These loans (the “Management Loans”)bear interest at 8.5% per year and compound quarterly, with the principal andinterest due in a lump sum on varying dates up to December 7, 2005. Theshares purchased with the Management Loans were held as security for theManagement Loans.

On September 5, 2002,the Board of Directors of Vertis Holdings adopted a unanimous written consentoffering those employees who had an outstanding Management Loan a one-timeoption to sell the shares securing the Management Loans back to Vertis Holdingsin exchange for the cancellation of the Management Loans. These shares had anassumed fair market value of $31.50 as of September 5, 2002. In addition,Vertis Holdings would forgive the interest that had accrued on the ManagementLoans to any employee who sold their stock back to Vertis Holdings. The taxconsequence, if any, of the interest forgiveness was the responsibility of theemployee. Employees eligible for the Vertis’ Executive Incentive Plan wereallowed to offset the tax consequences by a partial payment of their 2002 bonus.Substantially all employees holding the Management Loans elected this option. Asof December 31, 2003, 111,448 shares of Vertis Holdings had been sold tothe Company in exchange for cancellation of the Management Loans and $0.7million of interest was forgiven.

**ITEM 14**            PRINCIPALACCOUNTANT FEES AND SERVICES

Thefollowing table presents fees for professional audit services rendered byDeloitte & Touche LLP, the member firms of Deloitte Touche Toumatsu,and their respective affiliates (collectively, the “Deloitte Entities”) for theaudit of our consolidated annual financial statements for the years ended December 31,2005 and 2004, and fees billed for other services rendered by DeloitteEntities.

| ** **             | ** ** | **Year ended December 31**, | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **             | ** ** | **(in thousands)**                    | ** ** |
| Audit fees(1)          |       | $                                          | 1,214      |   | $ | 1,376 |   |
| Audit-related  fees(2) |       | 550                                        |       | 321 |   |
| Tax fees(3)            |       | 631                                        |       | 650 |   |
| Total fees billed      |       | $                                          | 2,395      |   | $ | 2,347 |   |

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(1)          Audit fees consist offees for professional services rendered for the audit of our consolidatedfinancial statements, review of financial statements included in our quarterlyreports, comfort letters and other services related to SEC matters, as well asservices that are normally provided by the independent registered publicaccounting firm in connection with statutory and regulatory filings orengagements.

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(2)          Audit-related feesconsist mainly of services related to Sarbanes Oxley Section 404 readinessand agreed-upon procedures engagements.

(3)          Taxfees consist of compliance fees for the preparation of the corporate taxreturns, assistance with federal tax audit, tax advice and tax planning as wellas other miscellaneous services.

**AuditCommittee Pre-Approval Policies**

The audit committee has established pre-approvalpolicies and procedures pursuant to which the audit committee must approve allaudit and non-audit engagement fees and terms on a case-by-case basis (otherthan with respect to de minimis exceptions permitted by the Sarbanes-Oxley Actof 2002). The audit committee is also responsible for considering, to theextent applicable, whether the independent auditors’ provision of othernon-audit services to the Company is compatible with maintaining theindependence of the independent auditors. In accordance with the pre-approvalpolicies and procedures of the audit committee, the Company’s management isauthorized to retain the independent auditors to provide audit related servicesin addition to the annual audit, including services related to SEC filings,accounting and reporting research and consultations, internal control reviews,quarterly reviews, benefit plan audits, consultations as to regulatory issuesregarding benefit plans, statutory audits of subsidiaries, attest services,acquisition due diligence services and corporate and subsidiary tax complianceand consulting services. Any additional services must be specificallypre-approved on an individual basis by the audit committee prior to theengagement of the independent auditor. The authority for such pre-approval maybe delegated to one or more designated members of the audit committee with anysuch pre-approval reported to the audit committee at its next regularlyscheduled meeting.

All services provided by Deloitte Entities in fiscal2005 were pre-approved by the audit committee or its designee.

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**PART IV**

**Item 15.**                 Exhibits and Financial Statement Schedules

(a)           Documents filed as partof this Report:

**1.   ConsolidatedFinancial Statements**

The consolidated financial statements required to befiled in this Annual Report on Form 10-K are listed on page F-1hereof.

**2.   FinancialStatement Schedules**

The financial statement schedule required in thisAnnual Report on Form 10-K is listed on page F-1 hereof. Therequired schedule appears on page F-37 hereof.

**3.   Exhibits**

| 3.1  |   | Restated Certificate of  Incorporation of Vertis, Inc.**                                                                                                                                                                                                                                                                              |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Amended and Restated  By-Laws of Vertis, Inc.**                                                                                                                                                                                                                                                                                       |
| 4.1  |   | Indenture, dated as of  June 24, 2002, among Vertis, Inc., (the “Company”), as Issuer, the  Company’s subsidiaries listed on the signature pages thereof (the  “Subsidiary Guarantors”) and the Bank of New York, as trustee.**                                                                         |
| 4.2  |   | Indenture, dated as of  June 6, 2003 (the “Indenture”), among the Company as Issuer, the  Subsidiary Guarantors and the Bank of New York, as Trustee.***                                                                                                                                                                    |
| 4.3  |   | U.S. Security Agreement,  dated December 7, 1999 and amended and restated as of June 6, 2003,  among the Company, the Subsidiary Guarantors, Vertis Holdings, Inc. and  certain of its subsidiaries listed on the signature page thereto, and GE  Capital, as Collateral Agent #                                  |
| 10.1 |   | $200,000,000 Credit  Agreement dated December 22, 2004 by and among Vertis, Vertis Limited,  Vertis Digital Services Limited, General Electric Capital Corporation, GECC  Capital Markets Group, Inc., Bank of America, N.A. and the other lenders  and credit parties named therein.^                                           |
| 10.2 |   | Limited Consent and  Amendment No. 1 to Credit Agreement, dated as of October 3, 2005 by  and among Vertis, Vertis Limited and Vertis Digital Services Limited, as  Borrowers, the other Credit Parties signatory hereto, General Electric Capital  Corporation, as a Lender and as Agent for Lenders and the other Lenders.**** |
| 10.3 |   | Amendment No. 2 to  Credit Agreement, dated as of November 22, 2005 by and among Vertis and  Vertis Digital Services Limited, as Borrowers, the other Credit Parties signatory  hereto, General Electric Capital Corporation, as a Lender and as Agent for  Lenders, and the other Lenders.****                                  |
| 10.4 |   | Limited Consent and  Amendment No. 3 to Credit Agreement, dated as of December 12, 2005  by and among Vertis and Vertis Digital Services Limited, as Borrowers, the  other Credit Parties signatory hereto, General Electric Capital Corporation,  as a Lender and as Agent for Lenders, and the other Lenders.****              |
| 10.5 |   | Termination Agreement,  dated November 25, 2005, by and among Manufacturers and Traders Trust  Company, not individually but solely as trustee under the Amended and  Restated Indenture and Servicing Agreement dated as of December 9, 2002,  Vertis Receivables LLC and Vertis, Inc.****                                      |
| 10.6 |   | Receivables Sale and  Servicing Agreement dated November 25, 2005 by and among Each of the  Entities Party Hereto From Time to Time as Originators, Vertis Receivables  II, LLC as Buyer and Vertis, Inc. as Servicer.****                                                                                                       |

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| 10.7  |   | Receivables Funding Administration Agreement dated  as of November 25, 2005 by and among Vertis Receivables II, LLC, as  Borrower, the Financial Institutions Signatory Hereto From Time to Time, as  Lenders, and General Electric Capital Corporation, as a Lender, as Swing Line  Lender and as Administrative Agent.**** |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8  |   | Annex X to Receivables  Sale and Servicing Agreement and Receivables Funding Administration Agreement  dated as of November 25, 2005.****                                                                                                                                                                                    |
| 10.9  |   | Stock Purchase Agreement  dated September 18, 2002 by and between Vertis Holdings and Dean D.  Durbin.*†                                                                                                                                                                                                                |
| 10.10 |   | Stock Purchase Agreement  dated September 20, 2002 by and between Vertis Holdings and John V.  Howard, Jr.*†                                                                                                                                                                                                       |
| 10.11 |   | Stock Purchase Agreement  dated September 24, 2002 by and between Vertis Holdings and Catherine S.  Leggett.*†                                                                                                                                                                                                          |
| 10.12 |   | Stock Purchase Agreement  dated September 16, 2002 by and between Vertis Holdings and Adriaan  Roosen.*†                                                                                                                                                                                                                |
| 10.13 |   | Employment Agreement  dated August 31, 2003 by and between Vertis, Vertis Holdings and Donald  Roland.#†                                                                                                                                                                                                                |
| 10.14 |   | Employment Agreement  dated August 31, 2003 by and between Vertis, Vertis Holdings and Dean D.  Durbin.#†                                                                                                                                                                                                               |
| 10.15 |   | Employment Agreement  dated August 31, 2003 by and between Vertis, Vertis Holdings and Herbert  W. Moloney III.#†                                                                                                                                                                                                       |
| 10.16 |   | Service Agreement dated  August 31, 2003 by and between Vertis Digital Services Limited and  Adriaan Roosen.#†                                                                                                                                                                                                          |
| 10.17 |   | Employment Agreement  dated August 31, 2003 by and between Vertis, Vertis Holdings and John  Howard.#†                                                                                                                                                                                                                  |
| 10.18 |   | Employment Agreement  dated August 31, 2003 by and between Vertis, Vertis Holdings and  Catherine Leggett.†^                                                                                                                                                                                                            |
| 10.19 |   | Memo of Understanding dated  August 15, 2003 by and between Vertis and Thomas Zimmer.#†                                                                                                                                                                                                                                 |
| 10.20 |   | Memo of understanding  dated August 15, 2003 by and between Vertis and David Colatriano.^†                                                                                                                                                                                                                              |
| 10.21 |   | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and Dean D. Durbin.^†                                                                                                                                                                       |
| 10.22 |   | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc. to  Dean D. Durbin.†^                                                                                                                                                                                                           |
| 10.23 |   | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and John V. Howard, Jr.†^                                                                                                                                                              |
| 10.24 |   | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc. to  John V. Howard, Jr.†^                                                                                                                                                                                                  |
| 10.25 |   | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and Catherine S. Leggett.†^                                                                                                                                                                 |
| 10.26 |   | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc. to  Catherine S. Leggett.†^                                                                                                                                                                                                     |

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| 10.27 |   | Restricted Stock Agreement dated May 20, 2004  by and among Vertis Holdings, Inc., Thomas H. Lee Equity Fund IV, L.P.  and Herbert W. Moloney III.†^                                                                                                                  |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28 |   | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc. to  Herbert W. Moloney III.†^                                                                                                                                                      |
| 10.29 |   | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and Donald E. Roland.†^                                                                                                                        |
| 10.30 |   | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc. to  Donald E. Roland.†^                                                                                                                                                            |
| 10.31 |   | Nil Cost Option  Agreement dated July 27, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and Adriaan Roosen.†^                                                                                                                          |
| 10.32 |   | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc. to  Adriaan Roosen.†^                                                                                                                                                              |
| 10.33 |   | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and David P. Colatriano.†^                                                                                                                     |
| 10.34 |   | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc. to  David P. Colatriano.†^                                                                                                                                                         |
| 10.35 |   | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and Thomas R. Zimmer.†^                                                                                                                        |
| 10.36 |   | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc. to  Thomas R. Zimmer.†^                                                                                                                                                            |
| 10.37 |   | Employment Agreement  dated October 13, 2004 by and between Vertis and Joe. M Scott.†^                                                                                                                                                                                     |
| 10.38 |   | Restricted Stock  Agreement dated November 1, 2004 by and among Vertis  Holdings, Inc., Thomas H. Lee Equity Fund IV, L.P. and Joe M. Scott.†^                                                                                                                        |
| 10.39 |   | Memo of Understanding  dated November 6, 2004 by and between Vertis and Herbert W. Moloney III  amending Mr. Moloney’s Employment Agreement dated August 31, 2003,  and filed as Exhibit 10.44 to Vertis’ 2003 Annual Report on Form 10-K.†^ |
| 10.40 |   | Memo of Understanding  dated November 6, 2004 by and between Vertis and Herbert W. Moloney III  amending Mr. Moloney’s Employment Agreement dated August 31, 2003  and filed as Exhibit 10.44 to Vertis’ 2003 Annual Report on Form 10-K.†^  |
| 10.41 |   | Memo of Understanding  dated November 12, 2004 by and between Vertis and Dean D. Durbin  amending Mr. Durbin’s Employment Agreement dated August 31, 2003  and filed as Exhibit 10.43 to Vertis’ 2003 Annual Report on Form 10-K.†^          |
| 10.42 |   | Employment Agreement  dated January 11, 2005 by and between Vertis and Gary L. Sutula.†^                                                                                                                                                                                   |
| 10.43 |   | Employment Agreement  dated March 3, 2005 by and between Vertis and Ann M. Raider.†****                                                                                                                                                                                    |
| 10.44 |   | Termination Agreement  dated November 9, 2005 by and between Vertis Digital Services Limited  and Adriaan Roosen.†****                                                                                                                                                     |
| 10.45 |   | Letter Agreement dated  March 9, 2006 amending Employment Agreement dated August 31, 2003  by and among Vertis, Vertis Holdings and Dean D. Durbin.†****                                                                                                              |
| 10.46 |   | Executive Incentive Plan  for Vertis Executives dated March 1, 2005.†****                                                                                                                                                                                                  |
| 10.47 |   | Employee Incentive Plan for  Vertis Executives dated February 1, 2006.†****                                                                                                                                                                                                |

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| 10.48 |   | Vertis  Holdings, Inc. 1999 Equity Award Plan****                                                                                                                                   |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.49 |   | Unanimous Written  Consent of the Board of Directors of Vertis Holdings, Inc. changing the  name of the Equity Award Plan to Vertis Holdings, Inc. 1999 Equity Award  Plan**** |
| 12.1  |   | Statement re computation of ratios of earnings to  fixed charges.****                                                                                                                    |
| 14.1  |   | Code of Ethics.#                                                                                                                                                                         |
| 21.1  |   | List of subsidiaries of  Vertis, Inc.****                                                                                                                                           |
| 31.1  |   | Certification of Dean D.  Durbin, President and Chief Executive Officer, dated March 27, 2006,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.****                 |
| 31.2  |   | Certification of Stephen  E. Tremblay, Chief Financial Officer, dated March 27, 2006, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.****                          |
| 32.1  |   | Certification of Dean D.  Durbin, President and Chief Executive Officer, dated March 27, 2006,  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.****                 |
| 32.2  |   | Certification of Stephen  E. Tremblay, Chief Financial Officer, dated March 27, 2006, pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.****                          |

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| *      |   | Incorporated by reference to the corresponding  exhibit to the Registrant’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2002. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **     |   | Incorporated by  reference to the corresponding exhibit to the Registrant’s registration  statement on Form S-4 (No. 333-97721).                     |
| ***    |   | Incorporated by  reference to the corresponding exhibit to the Registrant’s registration  statement on Form S-4 (No. 333-106435).                    |
| ****   |   | Filed herewith.                                                                                                                                                     |
| #      |   | Incorporated by  reference to the corresponding exhibit to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2003. |
| ^      |   | Incorporated by  reference to the corresponding exhibit to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004. |
| † |   | This exhibit is a  management contract or a compensatory plan or arrangement.                                                                                       |

 

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**VERTIS, INC. AND SUBSIDIARIES**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE**
|                                                                                                                                                      | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                                                             |       | F-2      |       |
| Consolidated  Balance Sheets at December 31, 2005 and 2004                                                                                      |       | F-3      |       |
| Consolidated Statements of Operations for the Years  Ended December 31, 2005, 2004 and 2003                                                     |       | F-4      |       |
| Consolidated Statements of Stockholder’s Deficit for  the Years Ended December 31, 2005, 2004 and 2003       |       | F-5      |       |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2005, 2004 and 2003                                                     |       | F-6      |       |
| Notes to Consolidated Financial Statements                                                                                                           |       | F-7      |       |
| Schedule of Valuation and Qualifying Accounts for the  Years Ended December 31, 2005, 2004 and 2003                                        |       | F-37     |       |
| Signatures                                                                                                                                           |       | F-38     |       |

 

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholder ofVertis, Inc. and Subsidiaries:Baltimore, Maryland

We have audited the accompanying consolidated balancesheets of Vertis, Inc. and Subsidiaries (the “Company”), a wholly-ownedsubsidiary of Vertis Holdings, Inc. as of December 31, 2005 and 2004and the related consolidated statements of operations, stockholder’s deficit,and cash flows for each of the three years in the period ended December 31,2005. Our audits also included the financial statement schedule referred to inthe Index at Item 15. These financial statements and financial statementschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on the financial statements and financial statementschedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of Vertis, Inc.and Subsidiaries at December 31, 2005 and 2004, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2005, in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, such financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, present fairly in all material respectsthe information set forth therein.

Deloitte & ToucheLLP

Baltimore, MarylandMarch 23, 2006

F-2

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**Vertis, Inc. and Subsidiaries**

**ConsolidatedBalance Sheets**
| As of December 31,                                                                | ** ** | ** **                                                      | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                                                       | ** ** | **In thousands, except  per share amounts** | ** ** |
| **ASSETS**                                                                                       |       |                                                            |       |      |       |
| Current Assets:                                                                                  |       |                                                            |       |      |       |
| Cash and cash equivalents                                                                        |       | $                                                               | 1,828      |      | $          | 2,638     |       |
| Accounts receivable, net                                                                         |       | 151,406                                                         |       | 142,818   |       |
| Inventories, net                                                                                 |       | 52,434                                                          |       | 42,747    |       |
| Maintenance parts, net                                                                           |       | 20,500                                                          |       | 21,017    |       |
| Prepaid expenses and other current assets                                                        |       | 9,027                                                           |       | 9,334     |       |
| Assets held for sale                                                                             |       |                                                            |       | 40,558    |       |
| Total current assets                                                                             |       | 235,195                                                         |       | 259,112   |       |
| Property, plant  and equipment, net                                                              |       | 336,665                                                         |       | 359,617   |       |
| Goodwill                                                                                         |       | 249,683                                                         |       | 246,854   |       |
| Deferred  financing costs, net                                                                   |       | 20,755                                                          |       | 26,815    |       |
| Other assets, net                                                                                |       | 30,341                                                          |       | 24,537    |       |
| Assets held for  sale                                                                            |       |                                                            |       | 132,860   |       |
| Total assets                                                                                     |       | $                                                               | 872,639    |      | $          | 1,049,795 |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                                  |       |                                                            |       |      |       |
| Current Liabilities:                                                                             |       |                                                            |       |      |       |
| Accounts payable                                                                                 |       | $                                                               | 231,426    |      | $          | 228,280   |       |
| Compensation and benefits payable                                                                |       | 37,773                                                          |       | 37,127    |       |
| Accrued interest                                                                                 |       | 14,110                                                          |       | 13,413    |       |
| Accrued income taxes                                                                             |       | 2,347                                                           |       | 10,427    |       |
| Other current liabilities                                                                        |       | 23,603                                                          |       | 18,070    |       |
| Liabilities held  for sale                                                                       |       |                                                            |       | 24,533    |       |
| Total current liabilities                                                                        |       | 309,259                                                         |       | 331,850   |       |
| Due to parent                                                                                    |       | 7,898                                                           |       | 7,410     |       |
| Long-term debt                                                                                   |       | 1,049,059                                                       |       | 1,024,042 |       |
| Other long-term  liabilities                                                                     |       | 32,301                                                          |       | 35,053    |       |
| Total liabilities                                                                                |       | 1,398,517                                                       |       | 1,398,355 |       |
| Stockholder’s  deficit:                                                                     |       |                                                            |       |      |       |
| Common stock—authorized  3,000 shares; $0.01 par value; issued and outstanding 1,000 shares |       |                                                            |       |      |       |
| Contributed capital                                                                              |       | 409,689                                                         |       | 409,059   |       |
| Accumulated deficit                                                                              |       | (926,895                                                        | )          | (753,661  | )          |
| Accumulated other comprehensive loss                                                             |       | (8,672                                                          | )          | (3,958    | )          |
| Total stockholder’s deficit                                                                 |       | (525,878                                                        | )          | (348,560  | )          |
| Total liabilities  and stockholder’s deficit                                                |       | $                                                               | 872,639    |      | $          | 1,049,795 |       |
|                                                                                                  |            |                                                                 |            |           |            |           |            |  |  |  |

 

 

See Notes to Consolidated Financial Statements.

F-3

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**Vertis, Inc. and Subsidiaries**

**ConsolidatedStatements of Operations**
| Year Ended December 31,                                                                          | ** ** | ** **            | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------|------------|-----------|------------|----------|------------|
| ** **                                                                                                      | ** ** | **In thousands** | ** ** |
| Net sales                                                                                                       |       | $                     | 1,510,288  |      | $          | 1,506,839 |       | $        | 1,448,475  |   |
| Operating expenses:                                                                                             |       |                  |       |      |       |      |       |
| Costs of production                                                                                             |       | 1,166,708             |       | 1,160,473 |       | 1,109,650 |       |
| Selling, general and administrative                                                                             |       | 156,103               |       | 160,765   |       | 165,775   |       |
| Restructuring charges                                                                                           |       | 17,119                |       | 4,501     |       | 14,649    |       |
| Depreciation and amortization of intangibles                                                                    |       | 64,731                |       | 67,456    |       | 76,262    |       |
|                                                                                                            |       | 1,404,661             |       | 1,393,195 |       | 1,366,336 |       |
| Operating income                                                                                                |       | 105,627               |       | 113,644   |       | 82,139    |       |
| Other expenses (income):                                                                                        |       |                  |       |      |       |      |       |
| Interest expense, net                                                                                           |       | 128,821               |       | 132,809   |       | 136,557   |       |
| Other, net                                                                                                      |       | 7,653                 |       | 47,685    |       | (5,760    | )          |
|                                                                                                            |       | 136,474               |       | 180,494   |       | 130,797   |       |
| Loss from continuing operations before income tax  (benefit) expense and cumulative effect of accounting change |       | (30,847               | )          | (66,850   | )          | (48,658   | )          |
| Income tax  (benefit) expense                                                                                   |       | (8,007                | )          | (65,934   | )          | 48,554    |       |
| Loss from  continuing operations before cumulative effect of accounting change                                  |       | (22,840               | )          | (916      | )          | (97,212   | )          |
| Discontinued  operations:                                                                                       |       |                  |       |      |       |      |       |
| (Loss) income from discontinued operations                                                                      |       | (148,790              | )          | (10,217   | )          | 1,287     |       |
| Cumulative effect  of accounting change                                                                         |       | 1,600                 |       |      |       |      |       |
| Net loss                                                                                                        |       | $                     | (173,230   | )         | $          | (11,133   | )          | $        | (95,925    | ) |

 

 

See Notes to Consolidated Financial Statements.

F-4

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**Vertis, Inc.and SubsidiariesConsolidated Statements of Stockholder’s Deficit**
|                                                                                                 | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** **      | ** **    | ** **      | ** ** | **Accumulated**        | ** **     | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------|------------|-----------------|---------------|-----------------|------------|------------------------|----------------|------------|------------|
| ** **                                                                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** **      | ** **    | ** **      | ** ** | **Other**              | ** **     | ** ** | ** ** |
| ** **                                                                                      | ** ** | ** **                                     | ** ** | **Common** | ** ** | **Contributed** | ** **    | **Accumulated** | ** ** | **Comprehensive**      | ** **     | ** ** | ** ** |
| ** **                                                                                      | ** ** | **Shares**                                     | ** ** | **Stock**  | ** ** | **Capital**     | ** **    | **Deficit**     | ** ** | **Income (Loss)** | ** **     | **Total**  | ** ** |
| ** **                                                                                      | ** ** | **In thousands, except where otherwise noted** | ** ** |
| **Balance  at January 1, 2003**                                                            |       |                                           | 1          |       |       |            | $ — |            |       |                   | $ 408,965 |       |       |   | $ (646,579 | ) |   |   | $ (12,378 | ) |   | $ (249,992 | ) |
| Net loss                                                                                        |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   | (95,925 | ) |   |   |   |   |   | (95,925 | ) |
| Currency  translation adjustment                                                                |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   |   |   |   |   | 3,037 |   |   | 3,037 |   |
| Minimum pension  liability adjustment, net of income tax benefit of $1.0 million                |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   |   |   |   |   | (1,436 | ) |   | (1,436 | ) |
| Fair value  adjustment of interest rate swap, net of income tax provision of $1.0 million  |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   |   |   |   |   | 2,127 |   |   | 2,127 |   |
| Comprehensive loss                                                                              |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   |   |   |   |   |   |   |   | (92,197 | ) |
| Other                                                                                           |       |                                           |       |       |       |            |          |            |       |                   | (1             | )          |       |   | (8 | ) |   |   |   |   |   | (9 | ) |
| **Balance at December 31, 2003**                                                           |       |                                           | 1          |       |       |            | —        |            |       |                   | 408,964        |       |       |   | (742,512 | ) |   |   | (8,650 | ) |   | (342,198 | ) |
| Net loss                                                                                        |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   | (11,133 | ) |   |   |   |   |   | (11,133 | ) |
| Currency  translation adjustment                                                                |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   |   |   |   |   | 5,962 |   |   | 5,962 |   |
| Minimum pension  liability adjustment                                                      |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   |   |   |   |   | (1,270 | ) |   | (1,270 | ) |
| Comprehensive loss                                                                              |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   |   |   |   |   |   |   |   | (6,441 | ) |
| Dividends to  parent                                                                            |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   | (15 | ) |   |   |   |   |   | (15 | ) |
| Capital contributions  by parent                                                                |       |                                           |       |       |       |            |          |            |       |                   | 95             |       |       |   |   |   |   |   |   |   |   | 95 |   |
| Other                                                                                           |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   | (1 | ) |   |   |   |   |   | (1 | ) |
| **Balance at December 31, 2004**                                                           |       |                                           | 1          |       |       |            |          |            |       |                   | 409,059        |       |       |   | (753,661 | ) |   |   | (3,958 | ) |   | (348,560 | ) |
| Net loss (1)                                                                                    |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   | (173,230 | ) |   |   |   |   |   | (173,230 | ) |
| Currency  translation adjustment (1)                                                            |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   |   |   |   |   | (4,294 | ) |   | (4,294 | ) |
| Minimum pension  liability adjustment                                                      |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   |   |   |   |   | (420 | ) |   | (420 | ) |
| Comprehensive loss                                                                              |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   |   |   |   |   |   |   |   | (177,944 | ) |
| Dividends to  parent                                                                            |       |                                           |       |       |       |            |          |            |       |                   |           |       |       |   | (4 | ) |   |   |   |   |   | (4 | ) |
| Capital  contributions by parent                                                                |       |                                           |       |       |       |            |          |            |       |                   | 660            |       |       |   |   |   |   |   |   |   |   | 660 |   |
| Other                                                                                           |       |                                           |       |       |       |            |          |            |       |                   | (30            | )          |       |   |   |   |   |   |   |   |   | (30 | ) |
| **Balance  at December 31, 2005**                                                          |       |                                           | 1          |       |       |            | $ — |            |       |                   | $ 409,689 |       |       |   | $ (926,895 | ) |   |   | $ (8,672 | ) |   | $ (525,878 | ) |

----

(1)          Includes a$1.4 million reclassification adjustment related to a translation gainrealized upon the sale of the Company’s Europe segment (see Note 4).

See Notes to Consolidated Financial Statements.

F-5

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**Vertis, Inc.and Subsidiaries**

**ConsolidatedStatements of Cash Flows**
| Year Ended December 31,                                                                                 | ** ** | ** **            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                                                             | ** ** | **In thousands** | ** ** |
| **Cash Flows from Operating Activities:**                                                                              |       |                  |       |     |       |     |       |
| Net loss                                                                                                               |       | $                     | (173,230   | )        | $          | (11,133  | )          | $        | (95,925    | ) |
| Adjustments for  discontinued operations                                                                               |       | 148,790               |       | 10,217   |       | (1,287   | )          |
| Net loss from continuing  operations                                                                                   |       | (24,440               | )          | (916     | )          | (97,212  | )          |
| Adjustments to reconcile net loss from continuing  operations to net cash provided by continuing operating activities: |       |                  |       |     |       |     |       |
| Depreciation and  amortization                                                                                         |       | 64,731                |       | 67,456   |       | 76,262   |       |
| Amortization of deferred  financing costs                                                                              |       | 7,265                 |       | 7,831    |       | 8,045    |       |
| Restructuring charges                                                                                                  |       | 17,119                |       | 4,501    |       | 14,649   |       |
| Write-off of deferred  financing fees                                                                                  |       |                  |       | 1,788    |       | 10,958   |       |
| Cumulative effect of accounting  change                                                                                |       | 1,600                 |       |     |       |     |       |
| Loss on termination of  leasehold interest                                                                             |       |                  |       | 44,012   |       |     |       |
| Deferred income taxes                                                                                                  |       |                  |       | (66,733  | )          | 47,322   |       |
| Other non-cash income and  expense, net                                                                                |       | 12,200                |       | 7,207    |       | 7,401    |       |
| Changes in operating assets and liabilities  (excluding effect of acquisitions and dispositions):                      |       |                  |       |     |       |     |       |
| (Increase) decrease in  accounts receivable                                                                            |       | (14,361               | )          | 7,340    |       | 7,788    |       |
| Increase in inventories                                                                                                |       | (9,687                | )          | (4,970   | )          | (2,052   | )          |
| (Increase) decrease in  prepaid expenses and other assets                                                              |       | (5,537                | )          | 3,815    |       | (4,148   | )          |
| (Decrease) increase in  accounts payable and other liabilities                                                         |       | (36,890               | )          | (15,435  | )          | 15,242   |       |
| Net cash provided by  continuing operating activities                                                                  |       | 12,000                |       | 55,896   |       | 84,255   |       |
| Net (loss) income from  discontinued operations                                                                        |       | (148,790              | )          | (10,217  | )          | 1,287    |       |
| Change in net assets of  discontinued operations held for sale                                                         |       | 142,483               |       | 1,866    |       | 3,504    |       |
| Net cash (used in)  provided by discontinued operations                                                                |       | (6,307                | )          | (8,351   | )          | 4,791    |       |
| Net cash provided by  operating activities                                                                             |       | 5,693                 |       | 47,545   |       | 89,046   |       |
| **Cash Flows from Investing Activities:**                                                                              |       |                  |       |     |       |     |       |
| Capital expenditures                                                                                                   |       | (40,168               | )          | (43,731  | )          | (37,296  | )          |
| Software development  costs capitalized                                                                                |       | (2,032                | )          | (1,905   | )          | (2,899   | )          |
| Proceeds from sale of  property, plant and equipment                                                                   |       | 1,021                 |       | 808      |       | 2,894    |       |
| Proceeds from sale of  subsidiaries, net                                                                               |       | 2,361                 |       |     |       |     |       |
| Proceeds from termination  of leasehold interest                                                                       |       |                  |       | 31,068   |       |     |       |
| Acquisition of business,  net of cash acquired                                                                         |       | (3,430                | )          |     |       | (93      | )          |
| Investing activities of  discontinued operations                                                                       |       | (1,517                | )          | (5,232   | )          | (3,509   | )          |
| Net cash used in  investing activities                                                                                 |       | (43,765               | )          | (18,992  | )          | (40,903  | )          |
| **Cash Flows from Financing Activities:**                                                                              |       |                  |       |     |       |     |       |
| Issuance of long-term  debt                                                                                            |       |                  |       |     |       | 340,714  |       |
| Issuance of long-term  debt under new revolving credit facility                                                        |       |                  |       | 103,294  |       |     |       |
| Repayment of debt under  prior revolving credit facility                                                               |       |                  |       | (102,932 | )          |     |       |
| Net borrowings  (repayments) under revolving credit facilities                                                         |       | 15,049                |       | (57,883  | )          | (85,300  | )          |
| Repayments of long-term  debt                                                                                          |       | (6                    | )          | (74      | )          | (310,474 | )          |
| Deferred financing costs                                                                                               |       | (1,204                | )          | (5,605   | )          | (12,846  | )          |
| Increase in outstanding  checks drawn on controlled disbursement accounts                                         |       | 15,030                |       | 13,976   |       | 12,784   |       |
| Dividends to parent                                                                                                    |       | (4                    | )          | (15      | )          |     |       |
| Capital contributions by  parent                                                                                       |       |                  |       | 95       |       |     |       |
| Distributions from (advances  to) parent                                                                               |       | 1,150                 |       | (47      | )          | (375     | )          |
| Financing activities of  discontinued operations                                                                       |       | 9,317                 |       | 19,583   |       | 2,321    |       |
| Net cash provided by  (used in) financing activities                                                                   |       | 39,332                |       | (29,608  | )          | (53,176  | )          |
| Effect of exchange rate  changes on cash                                                                               |       | (2,070                | )          | 1,610    |       | 1,381    |       |
| Net (decrease) increase  in cash and cash equivalents                                                                  |       | (810                  | )          | 555      |       | (3,652   | )          |
| Cash and cash equivalents  at beginning of year                                                                        |       | 2,638                 |       | 2,083    |       | 5,735    |       |
| Cash and cash equivalents at end of year                                                                               |       | $                     | 1,828      |     | $          | 2,638    |       | $        | 2,083      |   |
|                                                                                                                        |            |                       |            |          |            |          |            |          |            |  |  |  |  |  |

 

 

See Notes to Consolidated Financial Statements.

F-6

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**Vertis, Inc.and SubsidiariesNotes to Consolidated Financial Statements**

**1.**   BASISOF PRESENTATION

***Principlesof Consolidation***—The consolidated financialstatements include those of Vertis, Inc., and its subsidiaries (together,the “Company”). All significant intercompany balances and transactions havebeen eliminated.

***Ownership***—The Company is a wholly-owned subsidiary of Vertis Holdings, Inc.(“Vertis Holdings”).

***Business***—The Company is a leading provider of targeted advertising, media andmarketing services. The Company operates in two segments: Advertising Insertsand Direct Mail. Additionally, the Company provides other services which willbe referred to as “Corporate and Other” for discussion in these financialstatements (see Note 21).

***Use of Estimates***—The Company’s management must make estimates and assumptions inpreparing financial statements in conformity with accounting principlesgenerally accepted in the United States of America (“generally acceptedaccounting principles”). These estimates and assumptions affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses. Actual results could differ from those estimates.

***Reclassifications***—Certain amounts for prior periods have been reclassified to conform tothe current period presentation.

**2.**   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

***Revenue Recognition***—The Company provides a wide variety of print and print related servicesand products for specific customers, primarily under contract. Revenue is notrecognized until the earnings process has been completed. Print revenue isrecognized when the product is shipped (see Note 3). Revenue from premediaoperations is recognized upon the completion of orders. Unbilled receivablesare recorded for completed services or products which remain unbilled as of theperiod end.

The Company chargescustomers for shipping and handling charges. The amounts billed to customersare recorded as net sales and actual charges paid by the Company are includedin costs of production in the consolidated statements of operations.

***Cash and Cash Equivalents***—Cash equivalents include all investments with initial maturities of 90days or less. As the Company’s cash management program utilizes zero-balanceaccounts, book overdrafts in these accounts are reclassified as currentliabilities, and the fluctuation within these accounts is shown as the changein outstanding checks drawn on controlled disbursement accounts in thefinancing section of the Company’s consolidated statements of cash flows.

***Inventories***—Inventories are recorded at the lower of cost or market determinedprimarily on the first-in, first-out method.

***Maintenance Parts***—The Company maintains a supply of maintenance parts, primarilycylinders, drive motors, rollers and gear boxes, which are classified ascurrent assets on the Company’s consolidated balance sheets with the long-termportion included in Other assets, net.

***Long-lived Assets***—Property, plant and equipment are stated at cost. Depreciation andamortization are computed using the straight-line method over the assets’estimated useful lives, or when applicable, the terms of the leases, ifshorter.

The Company evaluates therecoverability of its long-lived assets, including property, plant andequipment and intangible assets, when there are changes in economiccircumstances or business objectives that indicate the carrying value may notbe recoverable. The Company’s evaluations include estimated future cash flows,profitability and estimated future operating results and other factorsdetermining fair 

F-7

----

value. Asthese assumptions and estimates may change over time, it may or may not benecessary to record impairment charges.

Software development costsincurred for software intended to be licensed to others are expensed untiltechnological feasibility is determined, after which costs are capitalizeduntil the product is ready for general release and sale. These costs areamortized over one to five-year lives beginning at the respective releasedates.

Certain direct developmentcosts associated with internal-use software are capitalized, including payrollcosts for employees devoting time to the software projects and external costsof material and services by third-party providers. These costs are included insoftware development and are being amortized beginning when the asset issubstantially ready for use. Costs incurred during the preliminary projectstage, as well as maintenance and training costs, are expensed as incurred.

Intangible assets otherthan goodwill are amortized over the terms of the related agreements. Deferredfinancing costs are amortized over the terms of the related financinginstruments.

***Goodwill***—Goodwill is accounted for under the Statement of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS142”). Under the provisions of this statement, the Company’s goodwill is testedfor impairment on an annual basis. The Company elected January 1 of eachyear as the annual test date. Each of the Company’s reporting units is testedfor impairment by comparing the fair value of the reporting unit with thecarrying value of that unit. Fair value is determined based on a valuationstudy performed by the Company using the discounted cash flow method and theestimated market values of the reporting units. See Note 4 for discussion ofthe Europe impairment loss recorded in 2005. No impairment of goodwill wasnoted in 2004 and 2003.

***Income Taxes***—Income taxes are accounted for under the asset and liability method asoutlined in SFAS No. 109 “Accounting for Income Taxes” (“SFAS 109”). Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes, and operating loss and tax creditcarryforwards.

The provision for federalincome taxes recorded by the Company represents the amount calculated asoutlined by SFAS 109 and allocated in accordance with a tax-sharing arrangementwith Vertis Holdings. State and foreign income taxes represent actual amountspaid or payable by the Company.

***Fair Value of Financial Instruments***—The Company determines the fair value of its financial instruments asfollows:

***Cash and Cash Equivalents, Accounts Receivable and AccountsPayable***—Carrying amounts approximate fair value because of the shortmaturities of these instruments.

***Revolving Credit Facility***—Carryingamount approximates fair value because its interest rates are based on variablereference rates.

***Long-Term Debt (Excluding Revolving Credit Facility)***—The fairvalue of the senior secured second lien notes, with a principal amount of$350.0 million, approximated $363 million and $380 million at December 31,2005 and 2004, respectively. The fair value of the senior unsecured notes, witha principal amount of $350.0 million, approximated $346 million and $380million at December 31, 2005 and 2004, respectively. The aggregate fairvalue of the remaining debt outstanding at December 31, 2005 and 2004approximated $240 million and $310 million, respectively.

***Stock Based Compensation***—Employeesof the Company participate in Vertis Holdings’ 1999 Equity Award Plan (the “StockPlan”), which authorizes grants of stock options, restricted stock, performanceshares and other stock based awards. Up until December 31, 2003, onlyoptions had been granted under the Stock Plan. In 2004, employees holdingoptions were given the opportunity to exchange their outstanding eligibleoptions for either restricted stock (U.S. - based employees) or Nil CostOptions (U.K.- based employees) as outlined in the exchange offer. All butapproximately 21,904 of the options were exchanged and restricted shares andnil cost options were issued pursuant to the exchange offer. In conjunctionwith the sale of the Company’s European segment (see Note 4), as of December 31,2005, all 

F-8

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nil costoptions were cancelled. See Note 16, “Vertis Holdings Stock Award and IncentivePlan”, for further discussion. The Company accounts for the Stock Plan underthe intrinsic value method, which follows the recognition and measurementprinciples of Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”). Approximately $0.1 million ofemployee compensation cost is reflected in net income in 2005. For the 7,618 optionsoutstanding under the Stock Plan at December 31, 2005, variable accountingis being applied.

Thefollowing table summarizes the effect of accounting for these awards as if thefair value recognition provisions of SFAS No. 123, “Accounting for StockBased Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123,” had been applied. There was no expense recorded in2004.
|                                                                                                              | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                   | ** ** | **(in thousands)** | ** ** |
| Net loss:                                                                                                    |       |                    |       |     |       |     |       |
| As reported                                                                                                  |       | $                       | (173,230   | )        | $          | (11,133  | )          | $ | (95,925 | ) |
| Deduct: total  stock-based compensation determined under fair value based method for all  awards, net of tax |       | (7                      | )          | (11      | )          | (1,100   | )          |
| Proforma                                                                                                     |       | $                       | (173,237   | )        | $          | (11,144  | )          | $ | (97,025 | ) |
|                                                                                                              |            |                         |            |          |            |          |            |  |  |  |  |  |  |

 

***Concentration of Credit Risk***—The Company provides services to a wide range of clients who operate inmany industry sectors in varied geographic areas. The Company grants credit toall qualified clients and does not believe that it is exposed to undueconcentration of credit risk to any significant degree.

***New Accounting Pronouncements***—In December 2004, the FASB issued SFAS 123R, “Share-BasedPayments”, which requires all share-based payments to employees, includinggrants of employee stock options and restricted stock, to be recognized in thefinancial statements based on their grant date fair values. The proformadisclosures previously permitted under SFAS No. 123 will no longer be analternative to financial statement recognition. Under SFAS 123R, companies mustdetermine the transition method, either retroactive or prospective, to be usedat the date of adoption; the appropriate fair value model to be used forvaluing share-based payments; and the amortization method for compensation cost.The provisions of this Statement shall be effective for the Company in thereporting period beginning January 1, 2006. The adoption of this statementis not expected to have a material impact on the Company’s results ofoperations or financial position.

In March 2005, theFASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations”,an interpretation of FASB Statement No. 143. FIN 47 requires thatcompanies recognize a liability for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated. This interpretation is effective no later than the end of fiscalyears ending after December 15, 2005. Retrospective application forinterim financial information is permitted but is not required. Early adoptionof this Interpretation is encouraged. The Company adopted FIN 47 on December 31,2005 and as a result recorded a $1.6 million cumulative effect of accountingchange (see the Company’s consolidated statement of operations). Proformaamounts for prior years are not presented as the impact on the ConsolidatedStatement of Operations would be insignificant and the cumulative effect wouldnot be significantly different from the current year’s cumulative effect.

In May 2005, the FASBissued SFAS No. 154 “Accounting Changes and Error Corrections—AReplacement of APB Opinion No. 20 and FASB Statement No. 3”. ThisStatement requires retrospective application to prior periods’ financialstatements of changes in accounting principle, unless it is impracticable todetermine either the period-specific effects or the cumulative effect of thechange. This Statement does not change the guidance for reporting thecorrection of an error in previously issued financial statements or a change inaccounting estimate.  The provisions ofthis Statement shall be effective for accounting changes and correction oferrors made in fiscal years beginning after December 15, 2005. The Companyis not able to assess at this time the future impact of this Statement on itsconsolidated financial position or results of operations.

F-9

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In February 2006, theFASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments—an amendment of Statements No. 133 and 140” (“SFAS 155”),which amends SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities” and SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishment of Liabilities”. SFAS 155permits fair value remeasurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation,clarifies which interest-only strips and principal-only strips are not subjectto the requirements of SFAS No. 133, establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation, clarifies that concentrations ofcredit risk in the form of subordination are not embedded derivatives, andamends SFAS No. 140 to eliminate the prohibition on a qualifyingspecial-purpose entity from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument. SFAS 155 is effective for all financial instruments acquired orissued after the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. The Company is not able to assess at this time thefuture impact of this Statement on its consolidated financial position orresults of operations.

**3.**   SUMMARYOF ACCOUNTING REVISIONS

In 2005, the Companyrevised its revenue recognition policy for printed materials to recognizerevenue when product is shipped. Previously revenue was recorded when thesematerials were completed and off-press. This revision resulted in a $12.7million decrease in revenue and a $2.9 million increase in loss from continuingoperations for the year ended December 31, 2005.

Based on a completephysical inventory of maintenance parts in 2005, the Company determined that itshould have capitalized all maintenance parts, rather than just those assetsthat exceeded the Company’s previous $100 minimum threshold for capitalization.As a result, the Company recorded $6.2 million of maintenance part assets in2005 that had not been capitalized previously. The recording of these assetsdecreased cost of production expenses and net loss for the year ended December31, 2005 by $6.2 million.

**4.**   DISCONTINUEDOPERATIONS

During the third quarterof 2005, the Company determined to account for the operations of its Europeansegment as a discontinued operation. The Company decided to sell the twodivisions in this segment primarily because each has incurred operating lossesin the past two years and neither was deemed a fit within the Company’s overallstrategy. The direct mail division of this segment was sold on October 3,2005 and the premedia division of this segment was sold on December 14,2005.

Selectedresults of the Company’s European segment, which are included in the Loss fromDiscontinued Operations on the Condensed Consolidating Statements ofOperations, are presented in the following table. No taxes were recorded inthis segment due to pretax losses and tax benefits being offset by deferred taxvaluation allowances, see Note 13. Interest was not allocated to discontinuedoperations as the divestiture of the European business was on a debt-freebasis. Prior year financial statements have been restated.

| ** **                                  | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| Net sales                                   |       | $                       | 99,982     |     | $          | 138,583  |       | $ | 137,435 |   |
| (Loss) income from operations               |       | $                       | (147,238   | )(1)     | $          | (10,217  | )          | $ | 1,287 |   |
| Loss on sale of  discontinued operations    |       | (1,552                  | )(2)       |     |       |     |       |
| (Loss) income from  discontinued operations |       | $                       | (148,790   | )        | $          | (10,217  | )          | $ | 1,287 |   |

----

(1)          Includes$136.2 million of other impairment charges, as discussed below, and write-downsof long-lived assets recorded prior to the sale.

(2)          Theloss on sale of discontinued operations is net of the costs incurred to sellthe Europe segment.

F-10

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The current assets and liabilities of the discontinuedoperations are presented separately under the captions “Assets held for sale”and “Liabilities held for sale,” respectively, in the accompanying CondensedConsolidated Balance Sheet at December 31, 2004. The components of thesebalance sheet line items are specified in the discontinued operations’ balancesheet as follows:
|                                                | ** ** | **December 31,**   | ** **     |
|------------------------------------------------|------------|-------------------------|----------------|
| ** **                                     | ** ** | **2004**                | ** **     |
| ** **                                     | ** ** | **(in thousands)** | ** **     |
| Assets held for sale—Current:             |       |                    |           |   |   |
| Accounts receivable, net                       |       |                    | $ 35,836  |   |   |
| Inventory                                      |       |                    | 1,850          |   |   |
| Other current assets                           |       |                    | 2,872          |   |   |
| Total current assets held for sale             |       |                    | $ 40,558  |   |   |
| Assets held for  sale—Long term:          |       |                    |           |   |   |
| Property, plant and equipment                  |       |                    | 19,821         |   |   |
| Goodwill                                       |       |                    | 113,010        |   |   |
| Other long-term assets                         |       |                    | 29             |   |   |
| Total long-term assets held for sale           |       |                    | $ 132,860 |   |   |
| Liabilities held  for sale:                    |       |                    |           |   |   |
| Accounts payable                               |       |                    | 15,625         |   |   |
| Accrued expenses and other current liabilities |       |                    | 8,908          |   |   |
| Total liabilities  held for sale               |       |                    | $ 24,533  |   |   |

 

As a result of the Company’simpairment testing, the Company recorded an impairment loss of $111.2 millionat its Europe segment to reduce the carrying value of goodwill to its impliedfair value. See Note 2 for discussion of the Company’s goodwill accountingpolicy. In addition, as a result of the conclusion of a direct mail contractwithin our Europe segment, long-lived assets with a carrying value of $1.2million were deemed impaired and written off in the second quarter of 2005. TheCompany also recorded a $23.8 million loss to write-down the carryingvalue of the remaining long-lived assets of its discontinued operations totheir estimated fair values, less cost to sell. These impairment losses areshown as discontinued operations for the year ended December 31, 2005.

**5.   RESTRUCTURING**

In 2005 the Company began a restructuring program (the“2005 Program”) aimed at regionalizing and streamlining operations tocapitalize on operating efficiencies and improve productivity and consistency,and reducing the Company’s overall cost base. The 2005 Program includedreductions in work force of approximately 490 employees; the closure of sixpremedia facilities, one advertising inserts warehouse, and two advertisinginserts regional offices, some of which are associated with the consolidationof operations; and the transfer of certain positions. The Company estimates thecosts associated with actions taken under the 2005 Program to be $19.9 million(net of estimated sublease income of $1.3 million), approximately all of whichwere recorded in 2005. The execution of the 2005 Program is complete as of December 31,2005. Included in the 2005 Program, are restructuring costs of $3.5 millionrelated to reductions in workforce of approximately 130 employees in theCompany’s Vertis Europe segment. These costs are included in the loss fromdiscontinued operations on the Company’s condensed consolidated statement ofoperations (see Note 4).

Liabilities for severance costs related to futurerestructurings are not accrued as the amounts cannot be reasonably estimated. TheCompany is continuously evaluating the need to implement restructuring programsto rationalize its costs and improve operating efficiency. It is likely thatthe Company will incur additional restructuring costs in 2006 in an on-goingeffort to achieve these objectives.

F-11

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In the year ended December 31, 2005, under the2005 Program, the Advertising Inserts segment recorded $7.0 million inseverance and related costs associated with the elimination of approximately186 positions and $0.8 million in facility closure costs associated with theclosure of two regional offices and one warehouse. The Direct Mail segmentrecorded $2.0 million in severance and related costs in 2005 associated withthe elimination of approximately 33 positions.  Corporate and Other recorded $5.1 million inseverance and related costs in 2005 associated with the elimination ofapproximately 91 positions and $1.7 million in facility closure costsassociated with the closure of six premedia facilities offset by $0.1 millionin gains from the sale of assets related to the closure of one of the premediafacilities. Additionally, $0.7 million in costs were recorded in the firstquarter of 2005 related to the amendment of an executive level employmentagreement announced in 2004, as discussed below.

Included in the 2005 segment severance amounts aboveare approximately $2.5 million of aggregate severance costs allocated to thesegments based on percentages established by management. These severance costsare related to the elimination of approximately 50 shared services positionsfor which the costs are allocated to the segments on a monthly basis.

In 2004, the Advertising Inserts segment recorded $0.2million in severance costs. Corporate and Other recorded $0.3 million inseverance costs due to headcount reductions of approximately 50 employees, and$3.5 million in facility closure costs. These costs were associated with the2003 Program discussed below. Additionally, in 2004 the Company announced anamendment of an executive level employment agreement resulting in an estimatedcost of $1.2 million. Corporate and Other recorded $0.5 million inrestructuring costs in 2004 related to this amendment. Europe recorded $2.4million in restructuring costs in 2004, which are included in the loss fromdiscontinued operations on the Company’s consolidated statement of operations.

The Company began a restructuring program in the U.S.and the U.K. in the third quarter of 2003 (the “2003 Program”), the executionof which was complete as of June 2004. The 2003 Program included theclosure of facilities, some of which were associated with the consolidation ofoperations; transfer of certain positions to the corporate office; reductionsin work force of approximately 260 employees; and the abandonment of assetsassociated with vacating these premises. As of December 31, 2004, costsassociated with the 2003 Program were $19.2 million (net of estimated subleaseincome of $7.7 million) of which approximately $3.0 million are non-cash costs.The European portion of the 2003 Program was complete as of December 31,2003. The North American portion of the 2003 Program was complete as of thesecond quarter of 2004, however an adjustment to restructuring expense of $3.0million was made in December 2004 as the amount of facility closure costsexpected to be paid was recalculated based on a revised assumption of estimatedsublease income.

In 2003 the Advertising Inserts segment and the DirectMail segment recorded, under the 2003 Program, $0.7 million and $0.2 million inseverance costs, due to headcount reductions of approximately 20 employeeseach, respectively. Also under the 2003 Program, Corporate and Other recorded$3.9 million in severance costs due to headcount reductions of approximately160 employees, $6.9 million in facility closure costs and $3.0 million in assetwrite-offs related to the closure of five facilities. Europe recorded $0.6million in restructuring costs in 2003, which are included in the loss fromdiscontinued operations on the Company’s consolidated statement of operations.

F-12

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The significant components of the restructuring andasset impairment charges were as follows:
|                                           | ** ** | **Severance**           | ** **               | **Asset Write**             | ** ** | **Facility** | ** **                                        | ** ** | ** ** | ** **   | ** ** |
|-------------------------------------------|------------|-------------------------|--------------------------|----------------------------------|------------|--------------|---------------------------------------------------|------------|------------|--------------|------------|
| ** **                                | ** ** | **and Related**    | ** **               | **Off & Disposal** | ** ** | **Closing**  | ** **                                        | **Other**  | ** ** | ** **   | ** ** |
| ** **                                | ** ** | **Costs**               | ** **               | **Costs**                        | ** ** | **Costs**    | ** **                                        | **Costs**  | ** ** | **Total**    | ** ** |
| ** **                                | ** ** | **(in thousands)** | ** **               |
| Balance at  January 1, 2003          |       |                    | $   2,073 |                             |       |         | $ 2,019                                      |       |       | $ 6,328 |       | $ 850 |   | $ 11,270 |   |
| Restructuring charges in  2003            |       |                    | 4,773                    |                             |       |         | 2,965                                             |       |       | 6,911        |       |   |   | 14,649 |   |
| Restructuring payments  and usage in 2003 |       |                    | (5,046                   | )                                |       |         | (4,984                                            | )          |       | (3,934       | )          | (325 | ) | (14,289 | ) |
| Balance at  December 31, 2003        |       |                    | 1,800                    |                             |       |         | —                                            |       |       | 9,305        |       | 525 |   | 11,630 |   |
| Restructuring charges in  2004            |       |                    | 960                      |                             |       |         | 35                                                |       |       | 3,506        |       |   |   | 4,501 |   |
| Restructuring  payments and usage in 2004 |       |                    | (2,016                   | )                                |       |         | (35                                               | )          |       | (5,939       | )          | 50 |   | (7,940 | ) |
| Balance at  December 31, 2004        |       |                    | 744                      |                             |       |         |                                              |       |       | 6,872        |       | 575 |   | 8,191 |   |
| Restructuring  charges in 2005            |       |                    | 14,748                   |                             |       |         | (109                                              | )          |       | 2,480        | (1)        |   |   | 17,119 |   |
| Restructuring  payments and usage in 2005 |       |                    | (12,572                  | )                                |       |         | 109                                               |       |       | (3,557       | )          | (575 | ) | (16,595 | ) |
| Balance at  December 31, 2005        |       |                    | $   2,920 |                             |       |         | $       — |       |       | $ 5,795 |       | $   — |   | $   8,715 |   |

----

(1)          Includes accretionexpense of $0.3 million.

Accrued restructuring reserves total approximately$8.7 million at December 31, 2005. The Company expects to payapproximately $5.4 million of the accrued restructuring costs during the nextyear, and the remainder, approximately $3.3 million, by 2011. The portion ofthis accrual attributable to facility closing costs is recorded net of estimatedsublease income at its present value. Actual future cash requirements maydiffer from the accrual, particularly if actual sublease income differs fromcurrent estimates.

The restructuring charges are comprised of thefollowing:
|                                                     | ** ** | **2005**           | ** ** | **2004**     | ** ** | **2003**      | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|--------------|------------|---------------|------------|
| ** **                                          | ** ** | **(in thousands)** | ** ** |
| Charges requiring  cash payments                    |       | $ 17,228      |       | $ 4,466 |       | $ 11,684 |       |
| (Gain) loss on  asset disposals in closed locations |       | (109               | )          | 35           |       | 2,965         |       |
|                                                |       | $ 17,119      |       | $ 4,501 |       | $ 14,649 |       |

 

**6.   ACQUISITIONS**

On January 20, 2005, the Company acquired EliteMailing and Fulfillment Services, Inc. (“Elite”) for $3.4 million. Eliteis a full-service lettershop and mail presorting facility based in Bellmawr,New Jersey. Elite has been a strategic partner of Vertis since 1996, providinglettershop and fulfillment services.

On June 10, 2003, the Company acquired the sales,marketing and media planning assets of The Newspaper Network, Inc.(collectively, “TNN”) by assuming the working capital deficit of approximately$4.3 million. The Newspaper Network, Inc. is a national sales andmarketing company that provides a wide variety of print advertising servicesspecializing in the planning, pricing and placement of newspaper advertisingthroughout the United States.

Goodwill arising in connection with the Eliteacquisition and the TNN acquisition was approximately $2.8 million and $1.1million, respectively.  Goodwill iscalculated as the excess of the liabilities assumed over the fair value of thenet assets acquired. The financial results of Elite and TNN are included in theCompany’s consolidated financial statements from the date of acquisition.

F-13

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Thefollowing unaudited pro forma information reflects the Company’s resultsadjusted to include Elite as though the acquisition had occurred at thebeginning of 2004 and TNN as though the acquisition had occurred at thebeginning of 2003.
|                                                                                | ** ** | **Twelve months ended** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                     | ** ** | **December 31,**             | ** ** |
| ** **                                                                     | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**           | ** ** |
| Net sales                                                                      |       | $ 1,510,329                  |       | $ 1,507,601 |   | $ 1,453,632 |   |
| Loss from  continuing operations before cumulative effect of accounting change |       | (22,859                           | )          | (1,086 | ) | (96,999 | ) |
| Net loss                                                                       |       | (173,249                          | )          | (11,303 | ) | (96,138 | ) |

 

**7.   ACCOUNTSRECEIVABLE**

Accounts receivable consisted of the following:
|                                  | ** ** | **2005**                | ** ** | **2004**       | ** ** |
|----------------------------------|------------|-------------------------|------------|----------------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** |
| Trade—billed                |       | $ 125,889          |       | $ 116,197 |       |
| Trade—unbilled              |       | 17,355                  | (1)        | 23,722         |       |
| Other receivables                |       | 9,725                   |       | 6,242          |       |
|                             |       | 152,969                 |       | 146,161        |       |
| Allowance for  doubtful accounts |       | (1,563                  | )          | (3,343         | )          |
|                             |       | $ 151,406          |       | $ 142,818 |       |

----

(1)          Reduced by a $12.7million adjustment related to the revision to the Company’s revenue recognitionpolicy (see  Note 3).

In December 2002, the Company entered into athree-year agreement, due to expire on November 30, 2005, to sellsubstantially all trade accounts receivable generated by subsidiaries in theU.S. (the “2002 Facility”) through the issuance of $130.0 million variable ratetrade receivable backed notes. In November 2005, the Company entered intoa new $130 million three-year revolving trade receivables facility (the “A/RFacility”) terminating in December 2008. Funds advanced pursuant to theA/R Facility were used by the Company to pay off the remaining obligationsunder and terminate the 2002 Facility.

Under the A/R Facility, as well as the 2002 Facilitypreviously in place, the Company sells its trade accounts receivable through abankruptcy-remote wholly-owned subsidiary. However, the Company maintains aninterest in the receivables and has been contracted to service the accountsreceivable. The Company received cash proceeds for servicing of $3.0 millionand $3.2 million in 2005 and 2004, respectively. These proceeds are fullyoffset by servicing costs.

The A/R Facility allows for a maximum of $130.0million of trade accounts receivable to be sold at any time based on the levelof eligible receivables and limited to a borrowing base linked to netreceivables balances and collections. Additional deductions may be made if theCompany fails to maintain a consolidated Compliance EBITDA (as defined in Note11) of at least $180 million for any rolling four fiscal quarter period. Inaddition, the A/R Facility includes certain targets related to its receivablescollections and credit experience including a minimum EBITDA of $160 million. Thereare also covenants customary for facilities of this type including requirementsrelated to the characterization of receivables transactions, credit andcollection policies, deposits of collections, maintenance by each party of itsseparate corporate identity including maintenance of separate records, books,assets and liabilities and disclosures about the transactions in the financialstatements of Vertis Holdings and its consolidated subsidiaries. Failure tomeet the targets or the covenants could lead to an acceleration of theobligations under the A/R Facility or the sale of assets securing the A/RFacility.

F-14

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At December 31, 2005 and 2004, accountsreceivable of $130.0 million had been sold under both the A/R Facility and the2002 Facility, respectively, and as such are reflected as reductions ofaccounts receivable. At December 31, 2005 and 2004, the Company retainedan interest in the pool of receivables in the form of overcollateralization andcash reserve accounts of $71.8 million and $58.0 million, under the A/RFacility and the 2002 Facility respectively, which is included in Accountsreceivable, net on the consolidated balance sheet at allocated cost, whichapproximates fair value. The proceeds from collections reinvested insecuritizations amounted to $1,595.7 million and $1,558.4 million in 2005 and2004, respectively.

Fees for the program varybased on the amount of interests sold and the London Inter Bank Offered Rate (“LIBOR”)plus an average margin of 50 basis points under the A/R Facility and 90 basispoints under the 2002 Facility. The Company also pays an unused commitment feeof 37.5 basis points on the difference between $130 million and the amount ofany advances. The loss on sale, which approximated the fees, totaled $5.2million in 2005, $3.1 million in 2004 and $2.6 million in 2003, and is includedin Other, net.

**8.   INVENTORIES**

Inventories consisted of the following:
|                   | ** ** | **2005**                | ** ** | **2004**      | ** ** |
|-------------------|------------|-------------------------|------------|---------------|------------|
| ** **        | ** ** | **(in thousands)** | ** ** |
| Paper             |       | $ 31,054           |       | $ 29,574 |       |
| Work in process   |       | 3,611                   |       | 5,324         |       |
| Finished goods    |       | 9,757                   | (1)        |          |       |
| Ink and chemicals |       | 3,743                   |       | 3,444         |       |
| Other             |       | 4,269                   |       | 4,405         |       |
|              |       | $ 52,434           |       | $ 42,747 |       |

----

(1)          Amount representsadjustment associated with the revision to the Company’s revenue recognitionpolicy (see  Note 3).

**9.   PROPERTY, PLANT AND EQUIPMENT**

Thecomponents and useful lives of property, plant and equipment were:

|                                                                     | ** ** | **Estimated**           | ** ** | ** ** | ** ** | ** **                           | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|--------------------------------------|------------|
| ** **                                                          | ** ** | **Useful Life**    | ** ** | ** ** | ** ** | ** **                           | ** ** |
| ** **                                                          | ** ** | **(Years)**             | ** ** | **2005**   | ** ** | **2004**                             | ** ** |
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| Land                                                                |       |                    |       |       |       | $     8,491 |       | $     8,491 |   |
| Machinery and  equipment                                            |       |                    | 5 to  15   |       |       | 649,774                              |       | 643,386 |   |
| Buildings and  leasehold improvements                               |       |                    | 1 to  40   |       |       | 89,587                               |       | 90,047 |   |
| Furniture and  fixtures                                             |       |                    | 3 to  10   |       |       | 112,018                              |       | 104,649 |   |
| Internally  developed computer software                             |       |                    | 3 to  5    |       |       | 18,953                               |       | 16,920 |   |
| Vehicles                                                            |       |                    | 3 to  5    |       |       | 1,159                                |       | 1,242 |   |
| Construction in  progress and deposits on equipment purchases  |       |                    |       |       |       | 21,187                               |       | 21,868 |   |
|                                                                |       |                    |       |       |       | 901,169                              |       | 886,603 |   |
| Accumulated  depreciation and amortization                          |       |                    |       |       |       | (564,504                             | )          | (526,986 | ) |
|                                                                |       |                    |       |       |       | $ 336,665                       |       | $ 359,617 |   |

 

F-15

----

**10.**   INVESTMENTS

The Company had two subsidiaries which were specialpurpose limited liability companies (“LLCs”) that were the head lessees andsub-lessors in two lease-leaseback transactions entered into in 1998. Underthese transactions, buildings with estimated useful lives of 65 years wereleased by the LLCs for terms of 57 years (the “Headleases”) and subleased bythe LLCs to the lessors for terms of 52 years (the “Subleases”). Under theguidelines of SFAS No. 13, “Accounting for Leases,” the Headleasesqualified as capital leases and the Subleases qualified as leveraged leases. TheCompany’s investments represented approximately 24% of the buildings’ combinedleasehold values, while the balance was furnished by third-party financing inthe form of long-term debt that provided no recourse against the LLCs or theCompany, but was secured by first liens on the properties.

On September 14, 2004, the Company entered into atermination and release agreement with the headlessor/sublessee whereby theCompany terminated its leasehold interest in the properties. The Companyreceived net proceeds of approximately $31 million, after transaction expenses,from one of the third parties that was financing the original arrangement. As aresult of the transaction, the Company recorded a non-cash loss related to thetermination and release of $44.0 million, which is included in Other, net in2004, and a tax benefit of $66.7 million (see Note 13).

Other, net includes $1.0 million of income earned onthe leveraged lease investments in 2004, prior to the termination of theleasehold interest, and $1.5 million in 2003.

**11.**   LONG-TERM DEBT

Long-term debt consistedof the following in the order of priority:

| ** **                                                                          | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                          | ** ** | **(in thousands)** | ** ** |
| Revolving credit  facility (due December 2008)                                 |       | $                       | 69,864     |     | $          | 48,801 |   |
| 93¤4%  senior secured second lien notes, net of discount (due April 2009) |       | 344,827                 |       | 343,235  |       |
| 107¤8%  senior notes, net of discount (due June 2009)                     |       | 348,756                 |       | 348,399  |       |
| 131¤2%  senior subordinated notes (due December 2009)                     |       | 293,495                 |       | 293,495  |       |
| Discount—131¤2%  senior subordinated credit facility                      |       | (7,883                  | )          | (9,895   | )          |
| Other notes                                                                         |       |                    |       | 7        |       |
|                                                                                |       | $                       | 1,049,059  |     | $          | 1,024,042 |   |

 

On December 22, 2004, the Company entered into a$200 million, four-year revolving credit agreement (the “Credit Facility”)consisting of a revolving credit facility of up to $200 million that provides forissuances of up to $45 million in letters of credit. The Credit Facilitymatures December 22, 2008 with no repayment of principal until maturity.

The maximum availability under the Credit Facility is$200 million, limited to a borrowing base calculated as follows: 85% of theCompany’s eligible receivables; 65% of the net amount of eligible rawmaterials, finished goods, maintenance parts, unbilled receivables and theresidual interest in the Company’s $130 million trade receivablessecuritization (see Note 7); and 45% of eligible machinery, equipment and ownedreal estate. The eligibility of such assets included in the calculation is setforth in the credit agreement. At December 31, 2005, the Company’sborrowing base calculation was $201.1 million.

In addition, as is customary in asset-basedagreements, there is a provision for the agent, in its reasonable creditjudgment, to establish reserves against availability based on a change incircumstances. The agent’s right to alter existing reserves requires writtenconsent from the borrowers when Compliance EBITDA, as defined below, is inexcess of $180 million on a quarterly trailing twelve-month basis. The agent isnot required to obtain written consent when Compliance EBITDA on a quarterlytrailing twelve-month basis is less than $180 million. At December 31,2005, the Company’s trailing twelve-month Compliance EBITDA as calculated underthe credit agreement is $182.5 million.

F-16

----

“Compliance EBITDA” is the Consolidated EBITDA asreflected in Note 21 to these financial statements adjusted for certain itemsas defined in the credit agreement.

The interest rate on the Credit Facility is either (a) theUS Prime rate, plus a margin which fluctuates based on the Company’s seniorsecured leverage ratio (“Leverage Ratio”), defined as the ratio of seniorsecured debt to EBITDA, or (b) the US LIBOR rate plus a margin thatfluctuates based on the Company’s Leverage Ratio. The EBITDA amount used inthis calculation is not equivalent to the amount included in these financialstatements, but rather is net of adjustments to exclude certain items asdefined in the credit agreement. At December 31, 2005, the margin was 275basis points above LIBOR. The Company also pays an unused commitment fee of 50basis points on the difference between $200 million and the amount of loans andletters of credit outstanding.

At December 31, 2005, the weighted-averageinterest rate on the Credit Facility was 7.33% as compared to 7.56% at December 31,2004.

The Credit Facility, the 9 3/4% senior secured secondlien notes (the “9 3/4% Notes”), the 10 7/8% senior notes and the 13 1/2%senior subordinated notes contain customary covenants including restrictions ondividends, and investments. In particular, these debt instruments all containcustomary high-yield debt covenants imposing limitations on the payment ofdividends or other distributions on or in respect of the Company or the capitalstock of its restricted subsidiaries. Substantially all of the Company’s assetsare pledged as collateral for the outstanding debt under the Credit Facility,and, on a second lien basis, the 9 3/4% Notes. All of the Company’s debt hascustomary provisions requiring prepayment in the event of a change in controland from the proceeds of asset sales, as well as cross-default provisions. Inaddition, the Credit Facility requires the Company to maintain ComplianceEBITDA of $160 million on a trailing twelve-month basis. At December 31,2005, the Company’s trailing twelve-month Compliance EBITDA as calculated underthe credit agreement is $182.5 million. If the Company is unable to maintainthis minimum Compliance EBITDA amount, the bank lenders could require theCompany to repay any amounts owing under the Credit Facility. At December 31,2005, the Company was in compliance with its debt covenants.

At December 31, 2005,the aggregate maturities of long-term debt were:

| ** ** | ** ** | **(in thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2006       |       |                    |       |   |   |
| 2007       |       |                    |       |   |   |
| 2008       |       |                    | $          | 69,864 |   |   |
| 2009       |       |                    | 979,195    |   |   |
| 2010       |       |                    |       |   |   |
| Thereafter |       |                    |       |   |   |
|       |       |                    | $          | 1,049,059 |   |   |

 

**12.**   LEASES

Facilities and certain equipment are leased underagreements that expire at various dates through 2016. Rental expense forcontinuing operations under operating leases for the years ended December 31,2005, 2004 and 2003, was $26.2 million, $26.4 million, and $28.1 million,respectively.

F-17

----

At December 31, 2005,minimum annual rentals under non-cancelable operating leases (net of subleases)were:

| ** ** | ** ** | **(in thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2006       |       |                    | $          | 25,477 |   |   |
| 2007       |       |                    | 17,931     |   |   |
| 2008       |       |                    | 11,295     |   |   |
| 2009       |       |                    | 8,144      |   |   |
| 2010       |       |                    | 6,387      |   |   |
| Thereafter |       |                    | 15,797     |   |   |
|       |       |                    | $          | 85,031 |   |   |

 

Commitments under the lease agreements also extend inmost instances to property taxes, insurance and maintenance and certain leasescontain escalation clauses and extension options.

**13.**   INCOME TAXES

Income tax (benefit) expenseconsisted of the following components:

| ** **                         | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                         | ** ** | **(in thousands)** | ** ** |
| Current:                           |       |                    |       |     |       |     |       |
| Federal                            |       | $                       | (8,324     | )        | $          | 1,000    |       | $ | 1,000 |   |
| State and foreign                  |       | 317                     |       | (201     | )          | 1,069    |       |
|                               |       | (8,007                  | )          | 799      |       | 2,069    |       |
| Deferred:                          |       |                    |       |     |       |     |       |
| Federal                            |       |                    |       | (66,733  | )          | 46,485   |       |
| State and foreign                  |       |                    |       |     |       |     |       |
|                               |       |                    |       | (66,733  | )          | 46,485   |       |
| Total income tax (benefit) expense |       | $                       | (8,007     | )        | $          | (65,934  | )          | $ | 48,554 |   |

 

Vertis Holdings files a consolidated Federal incometax return with all of its subsidiaries, including the Company. The componentsof income tax disclosed above have been allocated to the Company as if theCompany had filed a separate consolidated tax return.

The Company’s tax allocation arrangement does notprovide for remuneration in years in which the Company has a current taxableloss as in 2003, 2004, and 2005. There are no tax related intercompany balancesdue to or from the Company.

The Company’s foreign pre-tax income was not asignificant component of total pre-tax income or loss. The Company hasunremitted foreign earnings from its French subsidiary of approximately $1.0million for which it has recorded a deferred tax liability.

The following is areconciliation of the U.S. statutory federal income tax rate to the Company’seffective tax rates:

| ** **                                              | ** ** | **2005**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                              | ** ** | **(percent of pre-tax loss)** |
| Statutory income tax  rate                              |       | (35.0                                        | )%         | (35.0    | )%         | (35.0    | )%         |
| State income taxes, net  of federal income tax benefits |       |                                         |       | (0.5     | )          | 2.0      |       |
| Change in valuation  allowance                          |       | 34.6                                         |       | (65.7    | )          | 132.3    |       |
| Foreign income taxed at  other rates                    |       | (0.1                                         | )          | 1.6      |       | 4.0      |       |
| Adjustment to  contingency reserve                      |       | (27.0                                        | )          | 1.5      |       | 2.0      |       |
| Officer’s life insurance                           |       | (0.5                                         | )          |     |       | (7.0     | )          |
| Other                                                   |       | 2.0                                          |       | (0.4     | )          | 1.3      |       |
| Effective tax rate                                      |       | (26.0                                        | )%         | (98.5    | )%         | 99.6     | %          |

 

F-18

----

 

The tax effects ofsignificant items comprising deferred income taxes were:

| ** **                        | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                        | ** ** | **(in thousands)** | ** ** |
| Employee benefits                 |       | $                       | 15,054     |     | $          | 15,354 |   |
| Net tax benefit carry  forwards   |       | 162,285                 |       | 69,188   |       |
| Accrued expenses and  reserves    |       | 6,679                   |       | 8,576    |       |
| Other deductible  differences     |       |                    |       | 2,323    |       |
|                              |       | 184,018                 |       | 95,441   |       |
| Property, plant and  equipment    |       | (49,049                 | )          | (52,832  | )          |
| Other taxable  differences        |       | (2,438                  | )          | (2,119   | )          |
|                              |       | (51,487                 | )          | (54,951  | )          |
| Valuation allowance               |       | (132,531                | )          | (40,490  | )          |
| Net deferred income tax liability |       | $                       | —     |     | $          | — |   |

 

On August 30, 2005, the Company reached atentative settlement agreement with the IRS resolving disputes over the taxdeductibility of net losses relating to five leasehold interests in real estateproperties that the company entered into in 1998. On January 23, 2006, theCompany signed a closing agreement with the IRS. The closing agreement issubject to final approval from the Congressional Joint Committee on Taxation.

As a result of the 2005 settlement agreement with theIRS, the Company reduced its tax reserves related to the IRS examination from$10.3 million to $ 2.0 million. The remaining amount owed to the IRS and statetax authorities is classified in the accompanying balance sheet as accruedincome taxes. The reduction resulted in an $8.3 million tax benefit in 2005.

During 2004, the Company recorded a tax benefit of$66.7 million from the termination of the Company’s leasehold interest in thesame real estate properties that were the subject of the Company’s 2005 IRSsettlement (see Note 10 for further discussion).

In the fourth quarter of 2005 the Company sold thestock of its Europe direct mail subsidiary which generated a capital losscarryforward in the U.S. of $137.0 million. Also in the fourth quarter, theEurope premedia subsidiary of the Company sold the stock of its subsidiariesgenerating a U.K. capital loss carryforward of $29.0 million. The U.S. capital loss carryforward expires in 2011. TheUK capital loss can be carried forward indefinitely.

Atthe end of 2005 the Company’s federal net operating loss carryforwards were$217.0 million. This amount is included in the consolidated Vertis Holdings netoperating loss carryforward. The carryforwards expire beginning in 2007 through2026.

TheCompany’s valuation allowance related to its deferred tax asset, which was$40.5 million at the beginning of 2005, was increased by $92.0 million to$132.5 million at the end of 2005. The valuation allowance reserves alldeferred tax assets that will not be offset by reversing taxable temporarydifferences. This treatment is required under SFAS No. 109, “Accountingfor Income Taxes”, when in the judgment of management, it is not more likelythan not that sufficient taxable income will be generated in the future torealize the deductible temporary differences. The Company’s deferred tax assetsand tax carryforwards remain available to offset taxable income in futureyears, thereby lowering any future cash tax obligations. The Company intends tomaintain a valuation allowance until sufficient positive evidence exists tosupport its reversal.

F-19

----

The Company is currentlyunder examination by various states as well as the Internal Revenue Service inthe United States. The Company believes it has adequate provisions for all openyears.

The Company made incometax payments of $0.2 million, $0.4 million and $0.8 million for the years endedDecember 31, 2005, 2004, and 2003, respectively.

**14.**   RETIREMENTPLANS

***Defined Benefit Plans—***The Company maintains definedbenefit plans, including pension and supplemental executive retirement plans.

Informationregarding the defined benefit plans, collectively, is as follows:

| ** **                                                                     | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                     | ** ** | **(in thousands)** | ** ** |
| **Components of net periodic  pension cost:**                                  |       |                    |       |     |       |     |       |
| Service cost                                                                   |       | $                       | 673        |     | $          | 686      |       | $ | 697 |   |
| Interest cost                                                                  |       | 2,271                   |       | 2,159    |       | 2,216    |       |
| Expected return on  assets                                                     |       | (1,358                  | )          | (1,023   | )          | (1,187   | )          |
| Net amortization  and deferral                                                 |       | 1,155                   |       | 944      |       | 721      |       |
| Settlements and curtailments                                                   |       | 443                     |       |     |       | 1,212    |       |
|                                                                           |       | $                       | 3,184      |     | $          | 2,766    |       | $ | 3,659 |   |
| **Changes  in benefit obligations:**                                           |       |                    |       |     |       |     |       |
| Benefit obligation  at beginning of year                                       |       | $                       | 40,022     |     | $          | 36,748   |       |   |   |
| Service cost                                                                   |       | 673                     |       | 686      |       |     |       |
| Interest cost                                                                  |       | 2,271                   |       | 2,159    |       |     |       |
| Actuarial loss                                                                 |       | 1,907                   |       | 2,145    |       |     |       |
| Benefits paid                                                                  |       | (2,512                  | )          | (1,716   | )          |     |       |
| Settlements and  curtailments                                                  |       | (1,573                  | )          |     |       |     |       |
| Benefit obligation  at end of year                                             |       | $                       | 40,788     |     | $          | 40,022   |       |   |   |
| **Changes  in plan assets:**                                                   |       |                    |       |     |       |     |       |
| Fair value of plan  assets at beginning of year                                |       | $                       | 15,076     |     | $          | 11,707   |       |   |   |
| Actual return on  assets                                                       |       | 903                     |       | 1,037    |       |     |       |
| Employer  contributions                                                        |       | 3,135                   |       | 4,048    |       |     |       |
| Benefits paid                                                                  |       | (2,512                  | )          | (1,716   | )          |     |       |
| Fair value of plan  assets at end of year                                      |       | $                       | 16,602     |     | $          | 15,076   |       |   |   |
| Unfunded status                                                                |       | $                       | 24,185     |     | $          | 24,946   |       |   |   |
| Unrecognized prior  service cost                                               |       | (869                    | )          | (1,546   | )          |     |       |
| Unrecognized  actuarial loss                                                   |       | (14,213                 | )          | (14,348  | )          |     |       |
| Net amount  recognized                                                         |       | $                       | 9,103      |     | $          | 9,052    |       |   |   |
| **Amounts  recognized in the consolidated balance sheet:**                     |       |                    |       |     |       |     |       |
| Accrued benefit  cost                                                          |       | $                       | 22,556     |     | $          | 22,086   |       |   |   |
| Accumulated other  comprehensive loss                                          |       | (13,453                 | )          | (13,034  | )          |     |       |
| Net amount  recognized                                                         |       | $                       | 9,103      |     | $          | 9,052    |       |   |   |
| **Weighted-average  assumptions used to calculate net periodic pension cost:** |       |                    |       |     |       |     |       |
| Discount rate                                                                  |       | 5.75                    | %          | 6.25     | %          | 6.75     | %          |
| Expected return on  plan assets                                                |       | 8.75                    | %          | 8.75     | %          | 8.75     | %          |
| Annual  compensation increase                                                  |       | 3.00                    | %          | 3.00     | %          | 3.00     | %          |
| **Weighted-average assumptions used to determine  benefit obligation:**        |       |                    |       |     |       |     |       |
| Discount rate                                                                  |       | 5.50                    | %          | 5.75     | %          |     |       |
| Annual  compensation increase                                                  |       | 3.00                    | %          | 3.00     | %          |     |       |

 

F-20

----

The Company expects tomake approximately $3.0 million of cash contributions to its pension plans in2006.

TheCompany expects to make the following benefit payments, which reflect expectedfuture service:

| ** ** | ** ** | **(in thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2006       |       |                    | $          | 3,012 |   |   |
| 2007       |       |                    | 2,277      |   |   |
| 2008       |       |                    | 1,958      |   |   |
| 2009       |       |                    | 2,823      |   |   |
| 2010       |       |                    | 2,453      |   |   |
| Thereafter |       |                    | 12,219     |   |   |
|       |       |                    | $          | 24,742 |   |   |

 

Forthe Company’s pension plans, the percentage of fair value of plan assets byasset category as of the measurement date are as follows:

| ** **                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| **Asset  category:**       |       |     |       |     |       |   |   |   |   |
| Equity securities          |       |     | 56         | %        |       |   | 57 | % |   |
| Fixed Income               |       |     | 39         | %        |       |   | 38 | % |   |
| Cash and cash  equivalents |       |     | 5          | %        |       |   | 5 | % |   |
|                       |       |     | 100        | %        |       |   | 100 | % |   |

 

The Company’s investmentstrategy for the pension plans is to maximize the long-term rate of return onplan assets within an acceptable level of risk in order to minimize the cost ofproviding pension benefits. The investment policy establishes a targetallocation for each asset class. Target allocations for 2005 are shown in thetable below.

TheCompany developed its expected long-term rate of return assumption based onhistorical experience and by evaluating input from the trustee managing theplans’ assets, including the trustee’s review of asset class returnexpectations by several consultants and economists as well as long-term inflationassumptions. The Company’s expected long-term rate of return on plan assets isbased on a target allocation of assets, which is based on the Company’sinvestment strategy. The plans strive to have assets sufficiently diversifiedso that adverse or unexpected results from one security class will not have anunduly detrimental impact on the entire portfolio. The target allocation ofassets is as follows:

| ** **              | ** ** | ** **          | ** ** | **Expected**                 | ** ** |
|-------------------------|------------|---------------------|------------|------------------------------|------------|
| ** **              | ** ** | **Percent of** | ** ** | **Long-term**                | ** ** |
| ** **              | ** ** | **Total**           | ** ** | **Rate of Return** | ** ** |
| **Asset  category:**    |       |                |       |                         |       |   |   |   |   |
| Large Cap  Equities     |       |                | 47         | %                            |       |   | 9.0 | % |   |
| Small/Mid Cap  Equities |       |                | 8          | %                            |       |   | 11.0 | % |   |
| International  Equities |       |                | 5          | %                            |       |   | 10.2 | % |   |
| Fixed Income            |       |                | 40         | %                            |       |   | 6.5 | % |   |
|                    |       |                | 100        | %                            |       |   |   |   |   |

 

***Deferred Compensation***—The Company also maintains a deferred compensation plan in whichcertain members of management may defer up to 100% of their total compensationthrough the date of their retirement. Long-term liabilities include balancesrelated to this plan of $6.6 million as of December 31, 2005 and $6.8million as of December 31, 2004.

F-21

----

***Defined Contribution Plans***—The Company maintains 401(k) and other investment plans foreligible employees. The Company recorded $5.0 million in expenses for the yearended December 31, 2005 and $7.6 million in 2003. The Company did not makematching contributions to its 401(k) plan in 2004 and thus did not recordany expense for the year ended December 31, 2004.

**15.   STOCKHOLDER’SDEFICIT**

***Contributed Capital***—In December 2005, in conjunction with the sale of the premediadivision of the Vertis Europe segment (see Note 4), Vertis Holdings assignedits rights to a $0.7 million receivable from the Vertis Europe premedia divisionto Vertis, Inc. as a contribution of capital. This receivable wassubsequently waived by Vertis, Inc.

Vertis Holdings has700,000 warrants outstanding at December 31, 2005, with an aggregate valueof $15.8 million. These warrants are held by the lenders of the seniorsubordinated credit facility which entitle the holders to purchase one share ofVertis Holdings’ stock for $0.01 per share. The warrants are immediatelyexercisable and expire on June 30, 2011.

***Dividends to Parent***—The Company paid approximately $4,000 and $15,000 of cash dividends toVertis Holdings in 2005 and 2004, respectively. No dividends were paid in 2003.

***AccumulatedOther Comprehensive Loss***—The components of accumulatedother comprehensive loss at December 31 were:

| ** **                           | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                           | ** ** | **Gross**               | ** ** | **Tax**  | ** ** | **Net**  | ** ** | **Gross** | ** ** | **Tax** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Tax** | ** ** | **Net** | ** ** |
| ** **                           | ** ** | **(in thousands)** | ** ** |
| Cumulative translation adjustments   |       | $                       | 76         |     |       |     | $          | 76 |   | $ | 4,370 |   |   |   | $ | 4,370 |   | $ | (1,592 | ) |   |   | $ | (1,592 | ) |
| Minimum pension liability adjustment |       | (13,454                 | )          | $        | (4,706     | )        | (8,748     | ) | (13,034 | ) | $ | (4,706 | ) | (8,328 | ) | (11,764 | ) | $ | (4,706 | ) | (7,058 | ) |
|                                 |       | $                       | (13,378    | )        | $          | (4,706   | )          | $ | (8,672 | ) | $ | (8,664 | ) | $ | (4,706 | ) | $ | (3,958 | ) | $ | (13,356 | ) | $ | (4,706 | ) | $ | (8,650 | ) |

 

**16.   VERTISHOLDINGS STOCK AWARD AND INCENTIVE PLAN**

Employees of the Companyparticipate in the Vertis Holdings 1999 Equity Award Plan (the “Stock Plan”),which authorizes grants of stock options, restricted stock, performance sharesand other stock based awards up to an aggregate limit of 10 million shares. On April 6,2004, the Company extended an offer to all eligible U.S.-based employeesholding options under the Stock Plan the opportunity to exchange theiroutstanding eligible options for restricted common stock on a 4 for 1 basis. Therestricted stock will vest immediately prior to a liquidity event, generallydefined as a public offering of our common stock (where immediately followingsuch offering, the aggregate number of shares of common stock held by thepublic, not including affiliates of the Company, represents at least 20% of thetotal number of outstanding shares), merger or other business combination, or asale or other disposition of all or substantially all of our assets to anotherentity for cash and/or publicly traded securities. Of the 782,484 eligibleVertis Holdings options, 774,866 were exchanged. Pursuant to the exchangeoffer, on June 7, 2004 Vertis Holdings issued 193,739 restricted shares ofstock. Additional restricted stock transactions are reflected in the tablebelow. Upon issuance, unearned compensation is charged to stockholders’ equityon Vertis Holdings balance sheet for the fair value of the restricted stock asdetermined by an independent valuation. At December 31, 2005, there were160,145 shares of restricted stock and 7,618 stock options outstanding under theStock Plan.

On June 14, 2004, theCompany extended an offer to all eligible U.K.-based employees holding optionsunder the Stock Plan the opportunity to exchange their outstanding eligibleoptions for Nil Cost 

F-22

----

Optionson a 4 for 1 basis. Of the 42,785 Vertis Holdings options eligible to beexchanged, 28,499 were exchanged. Pursuant to the exchange offer, on July 29,2004 Vertis Holdings granted 7,126 Nil Cost Options. These Nil Cost Optionswere cancelled in the fourth quarter of 2005 in conjunction with the sale ofthe two divisions comprising the Vertis Europe segment (see Note 4).

The Company accounts forthe Stock Plan under the intrinsic value method, which follows the recognitionand measurement principles of Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees.” Approximately $0.1 million of employee compensation cost is reflected innet income in 2005. Due to the uncertainty of the timing of a liquidity event,which would trigger the vesting of the restricted stock, and the fact that thenumber of shares that will actually vest is unknown, compensation expense willnot be recorded until a liquidity event takes place, or an event is probable ofoccurring. For the 7,618 options outstanding under the Stock Plan, variableaccounting applies.  There is no expenserecorded for the years ended December 31, 2005 and 2004 related to theseoptions as the estimated fair value of the Company’s stock is not more than theexercise price of the options.

Transactionsunder the Stock Plan were as follows:

| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                        | ** ** | **Restricted  Stock**                      | ** ** | **Nil Cost  Options** | ** ** | **Options** | ** ** | **Restricted  Stock** | ** ** | **Nil Cost  Options** | ** ** | **Options** | ** ** | **Options** | ** ** |
| ** **                        | ** ** | **(thousands of shares)**        | ** ** |
| Outstanding at  beginning of year |       |                                       | 197        | ** ** |   |   | **7** |   |   |   | 22 |   |   |   |   |   |   |   |   |   |   |   | 858 |   |   |   | 888 |   |   |
| Granted                           |       |                                       | 30         |   |   |   |   |   |   |   |   |   |   |   | 201 |   |   |   | 7 |   |   |   |   |   |   |   |   |   |   |
| Cancelled                         |       |                                       | (67        | ) |   |   | (7 | ) |   |   | (14 | ) |   |   | (4 | ) |   |   |   |   |   |   | (836 | ) |   |   | (30 | ) |   |
| Outstanding at  end of year       |       |                                       | 160        |   |   |   |   |   |   |   | 8 |   |   |   | 197 |   |   |   | 7 |   |   |   | 22 |   |   |   | 858 |   |   |
| Exercisable at end of period      |       |                                       |       |   |   |   |   |   |   |   | 8 |   |   |   |   |   |   |   |   |   |   |   | 21 |   |   |   | 684 |   |   |

 

Options outstanding at December 31,2005 have an exercise price of $31.50 per share and ten-year terms, with5,832 options expiring in 2009 and the remainder expiring in 2012. Alloutstanding options are fully vested at December 31, 2005. Restrictedshares granted in 2005 and 2004 have an estimated fair value of$0.6 million and $4.1 million, respectively. At December 31,2005, the Company had the ability to issue approximately 9.5 millionadditional shares under the Stock Plan. See the Stock Based Compensationsection under Note 2 for further discussion.

**17.   INTEREST EXPENSE, NET**

Interestexpense, net consists of the following:

| ** **                               | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(In thousands)** | ** ** |
| Interest cost                            |       | $                       | 123,320    |     | $          | 124,311  |       | $ | 118,663 |   |
| Amortization of  deferred financing fees |       | 7,265                   |       | 7,831    |       | 8,045    |       |
| Write-off of  deferred financing fees    |       |                    |       | 1,788    |       | 10,958   |       |
| Capitalized interest                     |       | (929                    | )          | (798     | )          | (832     | )          |
| Interest income                          |       | (835                    | )          | (323     | )          | (277     | )          |
|                                     |       | $                       | 128,821    |     | $          | 132,809  |       | $ | 136,557 |   |

 

F-23

----

The Company wrote offdeferred financing fees of $1.8 million in December 2004 in connectionwith the termination of the Prior Credit Facility. In June 2003, theCompany wrote off deferred financing fees of $11.0 million in connection withthe retirement of the Term A and B loans. See Note 11 for further discussion ofthese debt transactions.

The Company made interestpayments of $118.8 million, $123.2 million and $115.6 million in the yearsended December 31, 2005, 2004 and 2003, respectively.

**18.   OTHER,NET**

Other, net for the yearended December 31, 2005 consists primarily of $5.2 million in feesassociated with the A/R Facility (see Note 7), $1.6 million in losses on thesale of property, plant and equipment and $0.9 million in bank commitment fees.

Other, net for the yearended December 31, 2004 consists primarily of a $44.0 million lossassociated with the termination of the Company’s leasehold interest in theproperties as discussed in Note 10, offset by $1.0 million in income earned oninvestments accounted for as leveraged leases prior to the termination of theCompany’s leasehold interest. Additionally, included in Other, net are $3.1million in fees associated with the A/R Facility (see Note 7), $1.2 million inbank commitment fees and $0.4 million in losses on the sale of property, plantand equipment.

Other, net for the yearended December 31, 2003 consists primarily of a $10.1 million recoveryfrom a settlement to the legal proceeding arising from a life insurance policywhich covered the former Chairman of Vertis Holdings, Inc. Additionally,other, net includes $1.5 million in income earned on investments accounted foras leveraged leases (see Note 10), offset by $2.6 million in fees associatedwith the A/R Facility (see Note 7), $1.2 million in losses on the sale ofproperty, plant and equipment and $1.1 million in expense related to theremaining fair market value of an interest rate swap agreement attached to aterm loan that was paid off in 2003, at which point in time it became an ineffectivecash flow hedge. The remaining $0.9 million in expense consists ofmiscellaneous charges such as commitment fees and foreign exchange losses.

**19.   RELATEDPARTY TRANSACTIONS**

The Company has consultingagreements with the owners of Vertis Holdings under which these parties haveagreed to provide the Company with consulting services on matters involvingcorporate finance, strategic corporate planning and other management skills andservices. The annual fees payable to these parties under these agreementsamount to approximately $1.3 million. The Company paid approximately $1.3million in fees under these agreements in 2005, 2004 and 2003.

Included in the Company’s2003 interest expense is $0.7 million of interest forgiven in relation tothe cancellation of loans receivable from the Company’s employees.

F-24

----

**20.   QUARTERLYFINANCIAL INFORMATION—UNAUDITED**

Theresults of operations for the years ended December 31, 2005 and 2004 arepresented below.

| ** **                                                                                                      | ** ** | **First**               | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                                      | ** ** | **Quarter**             | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands)** | ** ** |
| **Year Ended December 31,  2005**                                                                          |       |                    |       |        |       |        |       |        |       |
| Net sales(1)                                                                                                    |       | $                       | 353,889    |        | $          | 363,399     |       | $           | 378,154    |   | $ | 414,846 |   |
| Gross profit(2)                                                                                                 |       | 56,762                  |       | 67,183      |       | 70,577      |       | 92,355      |       |
| (Loss) income  from continuing operations before income taxes and cumulative effect of  accounting change  |       | (28,392                 | )          | (9,605      | )          | (5,923      | )          | 13,073      |       |
| (Loss) income  from continuing operations before cumulative effect of accounting change                         |       | (28,650                 | )          | (9,870      | )          | 2,265       |       | 13,415      |       |
| Loss from  discontinued operations                                                                              |       | (101,278                | )          | (19,152     | )          | (26,822     | )          | (1,538      | )          |
| Cumulative effect  of accounting change (3)                                                                     |       |                    |       |        |       |        |       | 1,600       |       |
| Net (loss) income                                                                                               |       | (129,928                | )          | (29,022     | )          | (24,557     | )          | 10,277      |       |
| **Year  Ended December 31, 2004**                                                                          |       |                    |       |        |       |        |       |        |       |
| Net sales                                                                                                       |       | $                       | 353,751    |        | $          | 358,037     |       | $           | 379,200    |   | $ | 415,851 |   |
| Gross profit                                                                                                    |       | 65,090                  |       | 67,592      |       | 70,952      |       | 85,230      |       |
| (Loss) income from  continuing operations before income taxes taxes(4)                                          |       | (10,421                 | )          | (10,057     | )          | (50,023     | )          | 3,651       |       |
| (Loss) income  from continuing operations                                                                       |       | (10,643                 | )          | (10,421     | )          | 16,433      |       | 3,715       |       |
| Loss from  discontinued operations                                                                              |       | (610                    | )          | (1,225      | )          | (2,110      | )          | (6,272      | )          |
| Net (loss) income(4)                                                                                            |       | (11,253                 | )          | (11,646     | )          | 14,323      |       | (2,557      | )          |

----

(1)   Fourthquarter results include the effect on revenue of the Company’s revision to ourrevenue recognition policy which amounted to $12.7 million in 2005 (see Note3).

(2)   Fourth quarterresults include the effect of the Company’s revision to our revenue recognitionpolicy, as well as the revision to our maintenance parts capitalization policy,the total of which amounted to a $3.3 million increase in 2005 (see Note 3).

(3)          Fourth quarter resultsinclude the effect of adopting FIN 47 on December 31, 2005 (see Note 3).

(4)          Third quarter resultsinclude a $44.0 million loss and a $66.7 million tax benefit resulting from thetermination of the Company’s leasehold interest in properties as discussed inNote 10.

**21.   SEGMENTINFORMATION**

Followingthe sale of the Company’s Europe segment (see Note 4), as well as othermanagement changes, the Company changed its reportable segmentation from thegeographic segmentation used in prior periods. As of December 31, 2005,the Company operates in two business segments and all prior period segment datahas been reclassified to conform to this presentation. The accounting policiesof the business segments are the same as those described in Note 2 to theconsolidated financial statements. The segments are:

·       AdvertisingInserts—provides advertising insert programs and circulation-building newspaperproducts such as TV magazines, Sunday magazines and color comics.

·       DirectMail—provides direct mail products with varying levels of personalization anddirect marketing services such as fragrance samplers, coatings and chemicalproduction, commercial printing and specialized digital printing.

F-25

----

Inaddition, the Company also provides outsourced digital premedia and imagecontent management, creative services for advertising insert page layoutand design, and media planning and placement services. These services areincluded in the table below as “Corporate and Other”. Corporate and Other alsoincludes the Company’s general corporate costs, which reflect costs associatedwith the Company’s executive officers as well as other transactions that arenot allocated to the Company’s business segments.

TheCompany had operations in Europe, principally in the United Kingdom, that weresold in the fourth quarter of 2005. The operational results of the Company’sEuropean segment are included in discontinued operations for all periodspresented within these financial statements. See Note 4 for further discussion.

Following is information regarding the Company’ssegments:  

| ** **                                               | ** ** | ** **                                                                                  | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003**  | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|-----------|------------|
| ** **                                               | ** ** | ** **                                                                                  | ** ** | **(in thousands)** | ** ** |
| Net sales                                                |       | Advertising  Inserts                                                                        |       | $                       | 1,046,211  |     | $          | 1,065,171 |       | $ | 1,016,521 |   |
|                                                     |       | Direct Mail                                                                                 |       | 315,864                 |       | 297,852  |       | 290,992   |       |
|                                                     |       | Corporate and  Other                                                                        |       | 151,268                 |       | 153,469  |       | 159,438   |       |
|                                                     |       | Elimination of  intersegment sales                                                          |       | (3,055                  | )          | (9,653   | )          | (18,476   | )          |
|                                                     |       | Consolidated                                                                                |       | $                       | 1,510,288  |     | $          | 1,506,839 |       | $ | 1,448,475 |   |
| EBITDA                                                   |       | Advertising  Inserts                                                                        |       | $                       | 125,396    |     | $          | 143,611   |       | $ | 138,966 |   |
|                                                     |       | Direct Mail                                                                                 |       | 41,757                  |       | 38,027   |       | 34,240    |       |
|                                                     |       | Corporate and  Other                                                                        |       | (4,448                  | )          | (48,223  | )          | (9,045    | )          |
|                                                     |       | Consolidated  EBITDA                                                                        |       | 162,705                 |       | 133,415  |       | 164,161   |       |
|                                                     |       | Depreciation and  amortization                                                              |       |                    |       |     |       |      |       |
|                                                     |       | of intangibles                                                                              |       | 64,731                  |       | 67,456   |       | 76,262    |       |
|                                                     |       | Interest expense,  net                                                                      |       | 128,821                 |       | 132,809  |       | 136,557   |       |
|                                                     |       | Income tax (benefit)  expense                                                               |       | (8,007                  | )          | (65,934  | )          | 48,554    |       |
|                                                     |       | Consolidated loss from  continuing operations before cumulative effect of accounting change |       | $                       | (22,840    | )        | $          | (916      | )          | $ | (97,212 | ) |
| Restructuring  charges                                   |       | Advertising Inserts                                                                         |       | $                       | 7,805      |     | $          | 245       |       | $ | 636 |   |
|                                                     |       | Direct Mail                                                                                 |       | 1,983                   |       | 12       |       | 328       |       |
|                                                     |       | Corporate and Other                                                                         |       | 7,331                   |       | 4,244    |       | 13,685    |       |
|                                                     |       | Consolidated                                                                                |       | $                       | 17,119     |     | $          | 4,501     |       | $ | 14,649 |   |
| Depreciation and  amortization of intangibles            |       | Advertising Inserts                                                                         |       | $                       | 38,555     |     | $          | 37,531    |       | $ | 41,503 |   |
|                                                     |       | Direct Mail                                                                                 |       | 15,936                  |       | 18,388   |       | 19,841    |       |
|                                                     |       | Corporate and Other                                                                         |       | 10,240                  |       | 11,537   |       | 14,918    |       |
|                                                     |       | Consolidated                                                                                |       | $                       | 64,731     |     | $          | 67,456    |       | $ | 76,262 |   |
| Additions to long-lived  assets (excluding acquisitions) |       | Advertising Inserts                                                                         |       | $                       | 23,900     |     | $          | 23,645    |       | $ | 19,733 |   |
|                                                     |       | Direct Mail                                                                                 |       | 7,301                   |       | 8,670    |       | 8,669     |       |
|                                                     |       | Corporate and Other                                                                         |       | 10,999                  |       | 13,321   |       | 11,793    |       |
|                                                     |       | Consolidated                                                                                |       | $                       | 42,200     |     | $          | 45,636    |       | $ | 40,195 |   |
| Identifiable Assets                                      |       | Advertising Inserts                                                                         |       | $                       | 524,784    |     | $          | 534,438   |       | $ | 551,201 |   |
| ** **                                               |       | Direct Mail                                                                                 |       | 193,932                 |       | 190,145  |       | 199,573   |       |
| ** **                                               |       | Europe                                                                                      |       |                    |       | 174,653  | (1)        | 161,387   | (2)        |
|                                                     |       | Corporate and Other                                                                         |       | 153,923                 |       | 150,559  |       | 235,337   |       |
|                                                     |       | Consolidated                                                                                |       | $                       | 872,639    |     | $          | 1,049,795 |       | $ | 1,147,498 |   |

F-26

----

 

| Goodwill |   | Advertising Inserts |   | $      | 187,867 |   | $      | 187,867 |   | $ | 187,867 |   |
|----------|--------|---------------------|--------|--------|---------|--------|--------|---------|--------|---|---------|--------|
|     |   | Direct Mail         |   | 57,743 |    | 54,914 |   | 54,914  |   |
|     |   | Corporate and Other |   | 4,073  |    | 4,073  |   | 7,299   |   |
|     |   | Consolidated        |   | $      | 249,683 |   | $      | 246,854 |   | $ | 250,080 |   |

----

(1)   Includescash of $1.2 million and assets held for sale of $173.4 million.

(2)   Includes cash of $0.9 millionand assets held for sale of $160.5 million.

**22.   GUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATED FINANCIAL INFORMATION**

The Company has senior notes (see Note 11), which aregeneral unsecured obligations of Vertis, Inc., and guaranteed by certainof Vertis, Inc.’s domestic subsidiaries. Accordingly, the following condensedconsolidated financial information as of December 31, 2005 and 2004, andfor the years ended December 31, 2005, 2004 and 2003 are included for (a) Vertis, Inc.(the “Parent”) on a stand-alone basis, (b) the guarantor subsidiaries, (c) thenon-guarantor subsidiaries and (d) the Company on a consolidated basis.

Investments in subsidiaries are accounted for usingthe equity method for purposes of the consolidating presentation. The principalelimination entries eliminate investments in subsidiaries, intercompanybalances and intercompany transactions. Separate financial statements and otherdisclosures with respect to the subsidiary guarantors have not been madebecause the subsidiaries are wholly-owned and the guarantees are full andunconditional and joint and several.

F-27

----

**CondensedConsolidating Balance Sheet at December 31, 2005**
|                                                                  | ** ** | ** **                                                       | ** ** | **Guarantor** | ** **                                                | **Non-Guarantor** | ** ** | ** **       | ** **                               | ** **       | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------|-----------------------------------------------------------|-------------------|------------|------------------|------------------------------------------|------------------|------------|
| ** **                                                       | ** ** | **Parent**                                                       | ** ** | **Companies** | ** **                                                | **Companies**     | ** ** | **Eliminations** | ** **                               | **Consolidated** | ** ** |
| ** **                                                       | ** ** | **In thousands**                                            | ** ** |
| **ASSETS**                                                       |       |                                                             |       |          |                                                      |              |       |             |                                     |             |       |   |   |   |   |   |   |   |   |
| Current Assets:                                                  |       |                                                             |       |          |                                                      |              |       |             |                                     |             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                       |       | $          320 |       |          | $         85 |              |       |             | $   1,423                 |             |       |   |   |   |   |   | $       1,828 |   |   |
| Accounts  receivable, net                                        |       | 145,853                                                          |       |          | 4,824                                                     |              |       |             | 729                                      |             |       |   |   |   |   |   | 151,406 |   |   |
| Inventories                                                      |       | 39,777                                                           |       |          | 12,654                                                    |              |       |             | 3                                        |             |       |   |   |   |   |   | 52,434 |   |   |
| Maintenance parts                                                |       | 18,102                                                           |       |          | 2,398                                                     |              |       |             |                                     |             |       |   |   |   |   |   | 20,500 |   |   |
| Prepaid expenses and  other                                      |       |                                                             |       |          |                                                      |              |       |             |                                     |             |       |   |   |   |   |   |   |   |   |
| current assets                                                   |       | 7,614                                                            |       |          | 1,396                                                     |              |       |             | 17                                       |             |       |   |   |   |   |   | 9,027 |   |   |
| Total current  assets                                            |       | 211,666                                                          |       |          | 21,357                                                    |              |       |             | 2,172                                    |             |       |   |   |   |   |   | 235,195 |   |   |
| Intercompany  receivable                                         |       | 116,882                                                          |       |          |                                                      |              |       |             |                                     |             |       |   | $ (116,882 | ) |   |   |   |   |   |
| Investments in  subsidiaries                                     |       | (12,982                                                          | )          |          | 859                                                       |              |       |             |                                     |             |       |   | 12,123 |   |   |   |   |   |   |
| Property, plant  and equipment, net                              |       | 271,094                                                          |       |          | 65,482                                                    |              |       |             | 89                                       |             |       |   |   |   |   |   | 336,665 |   |   |
| Goodwill                                                         |       | 198,229                                                          |       |          | 51,454                                                    |              |       |             |                                     |             |       |   |   |   |   |   | 249,683 |   |   |
| Deferred  financing costs, net                                   |       | 20,755                                                           |       |          |                                                      |              |       |             |                                     |             |       |   |   |   |   |   | 20,755 |   |   |
| Other assets, net                                                |       | 29,672                                                           |       |          | 649                                                       |              |       |             | 20                                       |             |       |   |   |   |   |   | 30,341 |   |   |
| Total Assets                                                     |       | $  835,316                                             |       |          | $ 139,801                                            |              |       |             | $   2,281                 |             |       |   | $ (104,759 | ) |   |   | $  872,639 |   |   |
| **LIABILITIES AND STOCKHOLDER’S**                           |       |                                                             |       |          |                                                      |              |       |             |                                     |             |       |   |   |   |   |   |   |   |   |
| **(DEFICIT) EQUITY**                                             |       |                                                             |       |          |                                                      |              |       |             |                                     |             |       |   |   |   |   |   |   |   |   |
| Current Liabilities:                                             |       |                                                             |       |          |                                                      |              |       |             |                                     |             |       |   |   |   |   |   |   |   |   |
| Accounts payable                                                 |       | $  212,046                                             |       |          | $ 19,138                                             |              |       |             | $      242 |             |       |   |   |   |   |   | $  231,426 |   |   |
| Compensation and  benefits payable                               |       | 33,717                                                           |       |          | 4,018                                                     |              |       |             | 38                                       |             |       |   |   |   |   |   | 37,773 |   |   |
| Accrued interest                                                 |       | 14,110                                                           |       |          |                                                      |              |       |             |                                     |             |       |   |   |   |   |   | 14,110 |   |   |
| Accrued income  taxes                                            |       | 2,135                                                            |       |          |                                                      |              |       |             | 212                                      |             |       |   |   |   |   |   | 2,347 |   |   |
| Other current  liabilities                                       |       | 10,245                                                           |       |          | 13,720                                                    |              |       |             | (362                                     | )                |       |   |   |   |   |   | 23,603 |   |   |
| Total current  liabilities                                       |       | 272,253                                                          |       |          | 36,876                                                    |              |       |             | 130                                      |             |       |   |   |   |   |   | 309,259 |   |   |
| Due to parent                                                    |       | 7,898                                                            |       |          | 97,305                                                    |              |       |             | 19,577                                   |             |       |   | $ (116,882 | ) |   |   | 7,898 |   |   |
| Long-term debt,  net of current portion                          |       | 1,049,059                                                        |       |          |                                                      |              |       |             |                                     |             |       |   |   |   |   |   | 1,049,059 |   |   |
| Other long-term  liabilities                                     |       | 31,984                                                           |       |          | 317                                                       |              |       |             |                                     |             |       |   |   |   |   |   | 32,301 |   |   |
| Total liabilities                                                |       | 1,361,194                                                        |       |          | 134,498                                                   |              |       |             | 19,707                                   |             |       |   | (116,882 | ) |   |   | 1,398,517 |   |   |
| Stockholder’s  (deficit) equity                             |       | (525,878                                                         | )          |          | 5,303                                                     |              |       |             | (17,426                                  | )                |       |   | 12,123 |   |   |   | (525,878 | ) |   |
| Total Liabilities and  Stockholder’s (Deficit) Equity  |       | $  835,316                                             |       |          | $ 139,801                                            |              |       |             | $   2,281                 |             |       |   | $ (104,759 | ) |   |   | $  872,639 |   |   |

 

 

F-28

----

**CondensedConsolidating Balance Sheet at December 31, 2004**

| ** **                                               | ** ** | **Parent**            | ** ** | **Guarantor  Companies** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                               | ** ** | **In thousands** | ** ** |
| **ASSETS**                                               | ** ** | ** **            |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current Assets:                                          | ** ** | ** **            |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                |       | $                     | 297        |                     |       | $                              | 33         |             |       |             | $          | 2,308 |   |   |   |   |   |   |   | $ | 2,638 |   |   |
| Accounts receivable, net                                 |       | 123,751               |       |                     | 18,736     |                           |       |             | 331        |             |       |   |   |   |   |   | 142,818 |   |   |
| Inventories                                              |       | 31,075                |       |                     | 11,669     |                           |       |             | 3          |             |       |   |   |   |   |   | 42,747 |   |   |
| Maintenance parts                                        |       | 17,557                |       |                     | 3,460      |                           |       |             |       |             |       |   |   |   |   |   | 21,017 |   |   |
| Prepaid expenses and other  current assets               |       | 8,872                 |       |                     | 417        |                           |       |             | 45         |             |       |   |   |   |   |   | 9,334 |   |   |
| Assets held for sale                                     |       |                  |       |                     |       |                           |       |             | 40,558     |             |       |   |   |   |   |   | 40,558 |   |   |
| Total current assets                                     |       | 181,552               |       |                     | 34,315     |                           |       |             | 43,245     |             |       |   |   |   |   |   | 259,112 |   |   |
| Intercompany receivable                                  |       | 1,038                 |       |                     | 34,284     |                           |       |             |       |             |       |   | $ | (35,322) |   |   |   |   |   |   |
| Investments in subsidiaries                              |       | 228,816               |       |                     | 33,489     |                           |       |             |       |             |       |   | (262,305) |   |   |   |   |   |   |
| Property, plant and equipment, net                       |       | 270,269               |       |                     | 89,207     |                           |       |             | 141        |             |       |   |   |   |   |   | 359,617 |   |   |
| Goodwill                                                 |       | 198,228               |       |                     | 48,626     |                           |       |             |       |             |       |   |   |   |   |   | 246,854 |   |   |
| Deferred financing costs, net                            |       | 26,815                |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   | 26,815 |   |   |
| Other assets, net                                        |       | 23,675                |       |                     | 855        |                           |       |             | 7          |             |       |   |   |   |   |   | 24,537 |   |   |
| Assets held for sale                                     |       |                  |       |                     |       |                           |       |             | 132,860    |             |       |   |   |   |   |   | 132,860 |   |   |
| Total Assets                                             |       | $                     | 930,393    |                     |       | $                              | 240,776    |             |       |             | $          | 176,253 |   |   |   | $ | (297,627) |   |   |   | $ | 1,049,795 |   |   |
| **LIABILITIES AND STOCKHOLDER’S  (DEFICIT) EQUITY** |       |                  |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   |   |
| Current Liabilities:                                     | ** ** | ** **            |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Accounts payable                                         |       | $                     | 196,604    |                     |       | $                              | 31,472     |             |       |             | $          | 204 |   |   |   |   |   |   |   | $ | 228,280 |   |   |
| Compensation and benefits payable                        |       | 29,455                |       |                     | 7,637      |                           |       |             | 35         |             |       |   |   |   |   |   | 37,127 |   |   |
| Accrued interest                                         |       | 13,413                |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   | 13,413 |   |   |
| Accrued income taxes                                     |       | 10,490                |       |                     | (204)      |                           |       |             | 141        |             |       |   |   |   |   |   | 10,427 |   |   |
| Other current liabilities                                |       | 18,557                |       |                     | (125)      |                           |       |             | (362)      |             |       |   |   |   |   |   | 18,070 |   |   |
| Liabilities held for sale                                |       |                  |       |                     |       |                           |       |             | 24,533     |             |       |   |   |   |   |   | 24,533 |   |   |
| Total current liabilities                                |       | 268,519               |       |                     | 38,780     |                           |       |             | 24,551     |             |       |   |   |   |   |   | 331,850 |   |   |
| Due to parent                                            |       |                  |       |                     |       |                           |       |             | 42,732     |             |       |   | $ | (35,322) |   |   |   | 7,410 |   |   |
| Long-term debt, net of   current portion                 |       | 975,241               |       |                     |       |                           |       |             | 48,801     |             |       |   |   |   |   |   | 1,024,042 |   |   |
| Other long-term liabilities                              |       | 35,193                |       |                     | (166)      |                           |       |             | 26         |             |       |   |   |   |   |   | 35,053 |   |   |
| Total liabilities                                        |       | 1,278,953             |       |                     | 38,614     |                           |       |             | 116,110    |             |       |   | (35,322) |   |   |   | 1,398,355 |   |   |
| Stockholder’s (deficit) equity                      |       | (348,560)             |       |                     | 202,162    |                           |       |             | 60,143     |             |       |   | (262,305) |   |   |   | (348,560) |   |   |
| Total Liabilities and  Stockholder’s                |       |                  |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| (Deficit) Equity                                         |       | $                     | 930,393    |                     |       | $                              | 240,776    |             |       |             | $          | 176,253 |   |   |   | $ | (297,627) |   |   |   | $ | 1,049,795 |   |   |

 

F-29

----

**CondensedConsolidating Statement of OperationsYear ended December 31, 2005**

| ** **                                                                              | ** ** | **Parent**            | ** ** | **Guarantor  Companies** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                              | ** ** | **In thousands** | ** ** |
| Net sales                                                                               |       | $                     | 1,232,755  |                     | $          | 273,696                        |       | $                | 3,015      |             |       | $ | 822 |   |   |   | $ | 1,510,288 |   |   |
| Operating expenses:                                                                     |       |                  |       |                     |       |                           |       |             |       |             |       |   |   |   |   |
| Costs of  production                                                                    |       | 965,603               |       | 198,638                  |       | 1,645                          |       |             | 822        |             |       |   | 1,166,708 |   |   |
| Selling, general  and administrative                                                    |       | 121,448               |       | 34,251                   |       | 404                            |       |             |       |             |       |   | 156,103 |   |   |
| Restructuring  charges                                                                  |       | 13,718                |       | 3,401                    |       |                           |       |             |       |             |       |   | 17,119 |   |   |
| Depreciation and  amortization of intangibles                                           |       | 51,606                |       | 13,101                   |       | 24                             |       |             |       |             |       |   | 64,731 |   |   |
|                                                                                    |       | 1,152,375             |       | 249,391                  |       | 2,073                          |       |             | 822        |             |       |   | 1,404,661 |   |   |
| Operating income                                                                        |       | 80,380                |       | 24,305                   |       | 942                            |       |             |       |             |       |   | 105,627 |   |   |
| Other expenses (income):                                                                |       |                  |       |                     |       |                           |       |             |       |             |       |   |   |   |   |
| Interest expense,  net                                                                  |       | 128,807               |       | 15                       |       | (1                             | )          |             |       |             |       |   | 128,821 |   |   |
| Other, net                                                                              |       | 7,653                 |       |                     |       |                           |       |             |       |             |       |   | 7,653 |   |   |
|                                                                                    |       | 136,460               |       | 15                       |       | (1                             | )          |             |       |             |       |   | 136,474 |   |   |
| Equity in net loss of subsidiaries                                                      |       | (123,908              | )          | (107,123                 | )          |                           |       |             | 231,031    |             |       |   |   |   |   |
| (Loss) income before income taxes                                                       |       | (179,988              | )          | (82,833                  | )          | 943                            |       |             | 231,031    |             |       |   | (30,847 | ) |   |
| Income tax (benefit)  expense                                                           |       | (8,358                | )          | 34                       |       | 317                            |       |             |       |             |       |   | (8,007 | ) |   |
| (Loss) income from continuing operations before  cumulative effect of accounting change |       | (171,630              | )          | (82,867                  | )          | 626                            |       |             | 231,031    |             |       |   | (22,840 | ) |   |
| Loss from discontinued operations                                                       |       |                  |       |                     |       | (148,790                       | )          |             |       |             |       |   | (148,790 | ) |   |
| Cumulative effect  of accounting change                                                 |       | 1,600                 |       |                     |       |                           |       |             |       |             |       |   | 1,600 |   |   |
| Net (loss) income                                                                       |       | $                     | (173,230   | )                        | $          | (82,867                        | )          | $                | (148,164   | )                |       | $ | 231,031 |   |   |   | $ | (173,230 | ) |   |

 

F-30

----

**CondensedConsolidating Statement of Operations Year ended December 31, 2004**

| ** **                                    | ** ** | **Parent**            | ** ** | **Guarantor  Companies** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **In thousands** | ** ** |
| Net sales                                     |       | $                     | 1,160,433  |                     |       | $                              | 346,348    |             |       |             | $          | 3,218 |   |   |   | $ | (3,160 | ) |   |   | $ | 1,506,839 |   |   |
| Operating expenses:                           |       |                  |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Costs of  production                          |       | 905,534               |       |                     | 256,376    |                           |       |             | 1,723      |             |       |   | (3,160 | ) |   |   | 1,160,473 |   |   |
| Selling, general  and administrative          |       | 123,120               |       |                     | 37,188     |                           |       |             | 457        |             |       |   |   |   |   |   | 160,765 |   |   |
| Restructuring  charges                        |       | 3,903                 |       |                     | 598        |                           |       |             |       |             |       |   |   |   |   |   | 4,501 |   |   |
| Depreciation and  amortization of intangibles |       | 49,280                |       |                     | 18,024     |                           |       |             | 152        |             |       |   |   |   |   |   | 67,456 |   |   |
|                                          |       | 1,081,837             |       |                     | 312,186    |                           |       |             | 2,332      |             |       |   | (3,160 | ) |   |   | 1,393,195 |   |   |
| Operating income                              |       | 78,596                |       |                     | 34,162     |                           |       |             | 886        |             |       |   |   |   |   |   | 113,644 |   |   |
| Other expenses (income):                      |       |                  |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Interest expense,  net                        |       | 132,799               |       |                     | 10         |                           |       |             |       |             |       |   |   |   |   |   | 132,809 |   |   |
| Other, net                                    |       | 4,672                 |       |                     | 24         |                           |       |             | 42,989     |             |       |   |   |   |   |   | 47,685 |   |   |
|                                          |       | 137,471               |       |                     | 34         |                           |       |             | 42,989     |             |       |   |   |   |   |   | 180,494 |   |   |
| Equity in net loss of subsidiaries            |       | (18,491               | )          |                     | (35,006    | )                              |       |             |       |             |       |   | 53,497 |   |   |   |   |   |   |
| Loss before income taxes                      |       | (77,366               | )          |                     | (878       | )                              |       |             | (42,103    | )                |       |   | 53,497 |   |   |   | (66,850 | ) |   |
| Income tax  (benefit) expense                 |       | (66,233               | )          |                     | (11        | )                              |       |             | 310        |             |       |   |   |   |   |   | (65,934 | ) |   |
| Loss from continuing operations               |       | (11,133               | )          |                     | (867       | )                              |       |             | (42,413    | )                |       |   | 53,497 |   |   |   | (916 | ) |   |
| Loss from  discontinued operations       |       |                  |       |                     |       |                           |       |             | (10,217    | )                |       |   |   |   |   |   | (10,217 | ) |   |
| Net (loss) income                             |       | $                     | (11,133    | )                        |       | $                              | (867       | )                |       |             | $          | (52,630 | ) |   |   | $ | 53,497 |   |   |   | $ | (11,133 | ) |   |

 

F-31

----

**CondensedConsolidating Statement of OperationsYear ended December 31, 2003**

| ** **                                    | ** ** | **Parent**            | ** ** | **Guarantor  Companies** | ** ** | **Non-  Guarantor  Companies** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **In thousands** | ** ** |
| Net sales                                     |       | $                     | 1,107,715  |                     |       | $                              | 356,937    |             |       |             | $          | 3,785 |   |   |   | $ | (19,962 | ) |   |   | $ | 1,448,475 |   |   |
| Operating expenses:                           |       |                  |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Costs of  production                          |       | 858,165               |       |                     | 268,858    |                           |       |             | 2,589      |             |       |   | (19,962 | ) |   |   | 1,109,650 |   |   |
| Selling, general  and administrative          |       | 130,002               |       |                     | 35,328     |                           |       |             | 445        |             |       |   |   |   |   |   | 165,775 |   |   |
| Restructuring  charges                        |       | 14,495                |       |                     | 154        |                           |       |             |       |             |       |   |   |   |   |   | 14,649 |   |   |
| Depreciation and  amortization of intangibles |       | 55,292                |       |                     | 20,872     |                           |       |             | 98         |             |       |   |   |   |   |   | 76,262 |   |   |
|                                          |       | 1,057,954             |       |                     | 325,212    |                           |       |             | 3,132      |             |       |   | (19,962 | ) |   |   | 1,366,336 |   |   |
| Operating income                              |       | 49,761                |       |                     | 31,725     |                           |       |             | 653        |             |       |   |   |   |   |   | 82,139 |   |   |
| Other expenses (income):                      |       |                  |       |                     |       |                           |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Interest expense,  net                        |       | 136,821               |       |                     | (264       | )                              |       |             |       |             |       |   |   |   |   |   | 136,557 |   |   |
| Other, net                                    |       | (5,791                | )          |                     | 31         |                           |       |             |       |             |       |   |   |   |   |   | (5,760 | ) |   |
|                                          |       | 131,030               |       |                     | (233       | )                              |       |             |       |             |       |   |   |   |   |   | 130,797 |   |   |
| Equity in net income of subsidiaries     |       | 33,769                |       |                     | (1,304     | )                              |       |             |       |             |       |   | (32,465 | ) |   |   |   |   |   |
| (Loss) income before income taxes             |       | (47,500               | )          |                     | 30,654     |                           |       |             | 653        |             |       |   | (32,465 | ) |   |   | (48,658 | ) |   |
| Income tax  expense (benefit)                 |       | 48,425                |       |                     | (13        | )                              |       |             | 142        |             |       |   |   |   |   |   | 48,554 |   |   |
| (Loss) income from continuing operations      |       | (95,925               | )          |                     | 30,667     |                           |       |             | 511        |             |       |   | (32,465 | ) |   |   | (97,212 | ) |   |
| Income from  discontinued operations          |       |                  |       |                     |       |                           |       |             | 1,287      |             |       |   |   |   |   |   | 1,287 |   |   |
| Net (loss) income                             |       | $                     | (95,925    | )                        |       | $                              | 30,667     |             |       |             | $          | 1,798 |   |   |   | $ | (32,465 | ) |   |   | $ | (95,925 | ) |   |

 

F-32

----

**CondensedConsolidating Statement of Cash FlowsTwelve months ended December 31, 2005**

| ** **                                                                | ** ** | ** **            | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|---------------|------------|---------------|------------|-------------|------------|
| ** **                                                                | ** ** | ** **            | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Consol-** | ** ** |
| ** **                                                                | ** ** | **Parent**            | ** ** | **Companies** | ** ** | **Companies** | ** ** | **idated**  | ** ** |
| ** **                                                                | ** ** | **In thousands** | ** ** |
| **Cash  Flows from Operating Activities**                                 |       | $                     | (36,842    | )             |       | $             | 48,437     |        |       |   | $ | (5,902 | ) |   | $ | 5,693 |   |
| **Cash Flows from Investing  Activities:**                                |       |                  |       |          |       |          |       |        |       |   |   |   |   |
| Capital expenditures                                                      |       | (36,238               | )          |          | (3,930     | )             |       |        |       |   |   | (40,168 | ) |
| Software development costs capitalized                                    |       | (2,032                | )          |          |       |          |       |        |       |   |   | (2,032 | ) |
| Proceeds from sale of property, plant and equipment  and divested assets  |       | 794                   |       |          | 227        |          |       |        |       |   |   | 1,021 |   |
| Proceeds from sale of subsidiaries, net                                   |       | 2,361                 |       |          |       |          |       |        |       |   |   | 2,361 |   |
| Acquisition of business, net of cash                                      |       | (3,430                | )          |          |       |          |       |        |       |   |   | (3,430 | ) |
| Investing activities of discontinued operations                           |       |                  |       |          |       |          |       |        | (1,517     | ) |   | (1,517 | ) |
| Net cash used in  investing activities                                    |       | (38,545               | )          |          | (3,703     | )             |       |        | (1,517     | ) |   | (43,765 | ) |
| **Cash  Flows from Financing Activities:**                                |       |                  |       |          |       |          |       |        |       |   |   |   |   |
| Net borrowings under revolving credit facilities                          |       | 15,049                |       |          |       |          |       |        |       |   |   | 15,049 |   |
| Repayments of long-term debt                                              |       | (6                    | )          |          |       |          |       |        |       |   |   | (6 | ) |
| Deferred financing costs                                                  |       | (1,204                | )          |          |       |          |       |        |       |   |   | (1,204 | ) |
| Increase in outstanding checks drawn on controlled disbursement  accounts |       | 14,349                |       |          | 681        |          |       |        |       |   |   | 15,030 |   |
| Other financing activities                                                |       | 47,222                |       |          | (45,363    | )             |       |        | (713)      |   |   | 1,146 |   |
| Financing activities of discontinued operations                           |       |                  |       |          |       |          |       |        | 9,317      |   |   | 9,317 |   |
| Net cash provided  by (used in) financing activities                      |       | 75,410                |       |          | (44,682    | )             |       |        | 8,604      |   |   | 39,332 |   |
| Effect of  exchange rate changes on cash                                  |       |                  |       |          |       |          |       |        | (2,070     | ) |   | (2,070 | ) |
| Net increase (decrease)  in cash and cash equivalents                     |       | 23                    |       |          | 52         |          |       |        | (885       | ) |   | (810 | ) |
| Cash and cash  equivalents at beginning of year                           |       | 297                   |       |          | 33         |          |       |        | 2,308      |   |   | 2,638 |   |
| Cash and cash  equivalents at end of year                                 |       | $                     | 320        |          |       | $             | 85         |        |       |   | $ | 1,423 |   |   | $ | 1,828 |   |

 

F-33

----

**CondensedConsolidating Statement of Cash FlowsTwelve months ended December 31, 2004**

| ** **                                                                      | ** ** | ** **            | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|---------------|------------|---------------|------------|-------------|------------|
| ** **                                                                      | ** ** | ** **            | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Consol-** | ** ** |
| ** **                                                                      | ** ** | **Parent**            | ** ** | **Companies** | ** ** | **Companies** | ** ** | **idated**  | ** ** |
| ** **                                                                      | ** ** | **In thousands** | ** ** |
| **Cash  Flows from Operating Activities**                                       |       | $                     | 36,657     |          |       | $             | 25,008     |        |       |   | $ | (14,120 | ) |   | $ | 47,545 |   |
| **Cash  Flows from Investing Activities:**                                      |       |                  |       |          |       |          |       |        |       |   |   |   |   |
| Capital expenditures                                                            |       | (36,739               | )          |          | (6,992     | )             |       |        |       |   |   | (43,731 | ) |
| Software development costs capitalized                                          |       | (1,905                | )          |          |       |          |       |        |       |   |   | (1,905 | ) |
| Proceeds from sale of property, plant and equipment  and divested assets   |       | 763                   |       |          | 45         |          |       |        |       |   |   | 808 |   |
| Proceeds from termination of leasehold interest                                 |       |                  |       |          |       |          |       |        | 31,068     |   |   | 31,068 |   |
| Investing activities of  discontinued operations                                |       |                  |       |          |       |          |       |        | (5,232     | ) |   | (5,232 | ) |
| Net cash (used in)  provided by investing activities                            |       | (37,881               | )          |          | (6,947     | )             |       |        | 25,836     |   |   | (18,992 | ) |
| **Cash Flows from Financing Activities:**                                       |       |                  |       |          |       |          |       |        |       |   |   |   |   |
| Net repayments under revolving credit facilities                                |       | (57,521               | )          |          |       |          |       |        |       |   |   | (57,521 | ) |
| Repayments of long-term debt                                                    |       | (72                   | )          |          | (2         | )             |       |        |       |   |   | (74 | ) |
| Deferred financing costs                                                        |       | (5,605                | )          |          |       |          |       |        |       |   |   | (5,605 | ) |
| Increase in outstanding checks drawn on controlled disbursement  accounts  |       | 12,187                |       |          | 1,789      |          |       |        |       |   |   | 13,976 |   |
| Other financing activities                                                      |       | 52,143                |       |          | (19,923    | )             |       |        | (32,187    | ) |   | 33 |   |
| Financing activities of  discontinued operations                                |       |                  |       |          |       |          |       |        | 19,583     |   |   | 19,583 |   |
| Net cash provided  by (used in) financing activities                            |       | 1,132                 |       |          | (18,136    | )             |       |        | (12,604    | ) |   | (29,608 | ) |
| Effect of  exchange rate changes on cash                                        |       |                  |       |          |       |          |       |        | 1,610      |   |   | 1,610 |   |
| Net (decrease)  increase in cash and cash equivalents                           |       | (92                   | )          |          | (75        | )             |       |        | 722        |   |   | 555 |   |
| Cash and cash  equivalents at beginning of year                                 |       | 389                   |       |          | 108        |          |       |        | 1,586      |   |   | 2,083 |   |
| Cash and cash  equivalents at end of year                                       |       | $                     | 297        |          |       | $             | 33         |        |       |   | $ | 2,308 |   |   | $ | 2,638 |   |

 

 

F-34

----

**CondensedConsolidating Statement of Cash FlowsTwelve months ended December 31, 2003**

| ** **                                                                | ** ** | ** **            | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|---------------|------------|---------------|------------|-------------|------------|
| ** **                                                                | ** ** | ** **            | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | **Consol-** | ** ** |
| ** **                                                                | ** ** | **Parent**            | ** ** | **Companies** | ** ** | **Companies** | ** ** | **idated**  | ** ** |
| ** **                                                                | ** ** | **In thousands** | ** ** |
| **Cash  Flows from Operating Activities**                                 |       | $                     | 29,709     |          |       | $             | 61,916     |        |       |   | $ | (2,579 | ) |   | 89,046 |   |
| **Cash  Flows from Investing Activities:**                                |       |                  |       |          |       |          |       |        |       |   |   |   |   |
| Capital expenditures                                                      |       | (27,148               | )          |          | (10,148    | )             |       |        |       |   |   | (37,296 | ) |
| Software development costs capitalized                                    |       | (2,899                | )          |          |       |          |       |        |       |   |   | (2,899 | ) |
| Proceeds from sale of property, plant and equipment  and divested assets  |       | 2,894                 |       |          |       |          |       |        |       |   |   | 2,894 |   |
| Acquisition of business, net of cash                                      |       | (93                   | )          |          |       |          |       |        |       |   |   | (93 | ) |
| Investing activities of discontinued operations                           |       |                  |       |          |       |          |       |        | (3,509     | ) |   | (3,509 | ) |
| Net cash used in  investing activities                                    |       | (27,246               | )          |          | (10,148    | )             |       |        | (3,509     | ) |   | (40,903 | ) |
| **Cash  Flows from Financing Activities:**                                |       |                  |       |          |       |          |       |        |       |   |   |   |   |
| Issuance of long-term debt                                                |       | 340,714               |       |          |       |          |       |        |       |   |   | 340,714 |   |
| Net repayments under revolving credit facilities                          |       | (85,300               | )          |          |       |          |       |        |       |   |   | (85,300 | ) |
| Repayments of long-term debt                                              |       | (310,431              | )          |          | (43        | )             |       |        |       |   |   | (310,474 | ) |
| Deferred financing costs                                                  |       | (12,846               | )          |          |       |          |       |        |       |   |   | (12,846 | ) |
| Increase in outstanding checks drawn on controlled disbursement  accounts |       | 11,671                |       |          | 1,113      |          |       |        |       |   |   | 12,784 |   |
| Other financing activities                                                |       | 50,528                |       |          | (52,829    | )             |       |        | 1,926      |   |   | (375 | ) |
| Financing activities of discontinued operations                           |       |                  |       |          |       |          |       |        | 2,321      |   |   | 2,321 |   |
| Net cash (used  in) provided by financing activities                      |       | (5,664                | )          |          | (51,759    | )             |       |        | 4,247      |   |   | (53,176 | ) |
| Effect of  exchange rate changes on cash                                  |       |                  |       |          |       |          |       |        | 1,381      |   |   | 1,381 |   |
| Net (decrease)  increase in cash and cash equivalents                     |       | (3,201                | )          |          | 9          |          |       |        | (460       | ) |   | (3,652 | ) |
| Cash and cash  equivalents at beginning of year                           |       | 3,590                 |       |          | 99         |          |       |        | 2,046      |   |   | 5,735 |   |
| Cash and cash equivalents  at end of year                                 |       | $                     | 389        |          |       | $             | 108        |        |       |   | $ | 1,586 |   |   | $ | 2,083 |   |
|                                                                           |            |                       |            |               |            |               |            |             |            |  |  |  |  |  |  |  |  |

 

F-35

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**23.**                               COMMITMENTSAND CONTINGENCIES

Certain claims, suits and allegations that arise inthe ordinary course of business and certain environmental claims have beenfiled or are pending against the Company. Management believes that all suchmatters in the aggregate would not have a material effect on the Company’sconsolidated financial statements.

*   *   *   *   *

F-36

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**VERTIS,INC. AND SUBSIDIARIESSCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**

| ** **                            | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charges (Credits)  to  Costs and  Expenses** | ** ** | **Write offs  Net of  Recoveries** | ** ** | **Balance  at End  of Year** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **In thousands**                        | ** ** |
| **Allowance  for Doubtful Accounts**  |       |                                         |       |                                                     |       |                                         |       |                                   |       |   |   |   |   |   |   |
| Year ended December 31, 2005     |       |                                         | $          | 3,344                                                    |       |                                         |       | $                                      | 1,544      |   |   |   | $ | (3,325 | ) |   | $ | 1,563 |   |
| Year ended  December 31, 2004    |       |                                         | $          | 3,865                                                    |       |                                         |       | $                                      | 709        |   |   |   | $ | (1,230 | ) |   | $ | 3,344 |   |
| Year ended  December 31, 2003    |       |                                         | $          | 5,731                                                    |       |                                         |       | $                                      | 1,623      |   |   |   | $ | (3,489 | ) |   | $ | 3,865 |   |
| **Deferred  Tax Valuation Allowance** |       |                                         |       |                                                     |       |                                         |       |                                   |       |   |   |   |   |   |   |
| Year ended December 31, 2005     |       |                                         | $          | 40,490                                                   |       |                                         |       | $                                      | 92,041     |   |   |   |   |   |   | $ | 132,531 |   |
| Year ended  December 31, 2004    |       |                                         | $          | 74,393                                                   |       |                                         |       | $                                      | (33,903    | ) |   |   |   |   |   | $ | 40,490 |   |
| Year ended  December 31, 2003    |       |                                         | $          | 6,968                                                    |       |                                         |       | $                                      | 67,425     |   |   |   |   |   |   | $ | 74,393 |   |

 

F-37

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

|        |   |   |   | VERTIS, INC.                                 |
|--------|--------|--------|--------|----------------------------------------------|
|   |   |   |   |                                         |
|   |   | BY:    |   | /s/ DEAN D. DURBIN                           |
|   |   |   |   | Name: Dean D. Durbin                         |
|   |   |   |   | Title: President and Chief Executive Officer |

 

Date: March 27, 2005

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below on behalf of theregistrant and in the capacities and on the dates indicated.

|                          | **Signatures** | ** **                                        | ** ** | ** **           | **Capacity** | ** ** | ** ** | ** ** | **Date** | ** ** |
|--------------------------|----------------|---------------------------------------------------|------------|----------------------|--------------|------------|------------|------------|----------|------------|
| /s/ DEAN D. DURBIN       |           | President and  Chief Executive Officer            |       | March 27,  2005 |
| Dean  D. Durbin          |           | (Principal Executive Officer)                     |       |                 |
| /s/ CIARA A. BURNHAM     |           | Director                                          |       | March 27,  2005 |
| Ciara  A. Burnham        |           |                                              |       |                 |
| /s/ JOHN T. DILLON       |           | Director                                          |       | March 27,  2005 |
| John  T. Dillon          |           |                                              |       |                 |
| /s/ ANTHONY J.  DINOVI   |           | Director                                          |       | March 27,  2005 |
| Anthony  J. DiNovi       |           |                                              |       |                 |
| /s/ THOMAS H.  LEE       |           | Director                                          |       | March 27,  2005 |
| Thomas  H. Lee           |           |                                              |       |                 |
| /s/ SOREN L.  OBERG      |           | Director                                          |       | March 27,  2005 |
| Soren  L. Oberg          |           |                                              |       |                 |
| /s/ MICHAEL S.  RAWLINGS |           | Director                                          |       | March 27,  2005 |
| Michael  S. Rawlings     |           |                                              |       |                 |
| /s/ DONALD E.  ROLAND    |           | Director                                          |       | March 27,  2005 |
| Donald  E. Roland        |           |                                              |       |                 |
| /s/ SCOTT M.  SPERLING   |           | Director                                          |       | March 27,  2005 |
| Scott  M. Sperling       |           |                                              |       |                 |
| /s/ STEPHEN E.  TREMBLAY |           | Chief Financial  Officer (Principal Financial and |       | March 27,  2005 |
| Stephen E.  Tremblay     |           | Accounting  Officer)                              |       |                 |

 

F-38

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