UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
 Washington, D.C.
20549
 
 
 FORM 10-Q
 
 
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 For
the quarterly period ended:  June 21, 2009
 
 Commission
file number 333-134701
 
 
 NETWORK
COMMUNICATIONS, INC.
 
 Formed under the laws of the State of
Georgia
 I.R.S. Employer Identification
Number 58-1404355
 
 2305
Newpoint Parkway, Lawrenceville, GA 30043
 Telephone Number:
(770) 962-7220
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
 
 Yes þ          No o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
 
 Yes o          No o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
 Large
accelerated filer
[   ]                                                              Accelerated
filer  [   ]                                              Non-accelerated
filer  [ü]Smaller reporting
company  [   ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
 
 Yes o          No þ
 
 Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
 
 Class
              
              Outstanding
      at June 21, 2009Common
      Stock, $0.001 par value per share
              
              100
      shares
 
  
  
 TABLE OF
CONTENTS
 PART I:
      FINANCIAL INFORMATIONItem 1.
                Condensed Consolidated Financial Statements
      (Unaudited)
                
                PageCondensed Consolidated Balance Sheets as of June 21, 2009 and
      March 29, 2009
                
                
                2Condensed Consolidated Statements of Operations for the three
      periods ended June 21, 2009 and June 22, 2008
                
                
                3Condensed Consolidated Statement of Stockholders’ Equity as of
      June 21, 2009
                
                
                4Condensed Consolidated Statements of Cash Flows for the three
      periods ended June 21, 2009 and June 22, 2008
                
                
                5Notes to Condensed Consolidated Financial
      Statements
                
                
                6Item 2.
                Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                
                
                16Item 3.
                Quantitative and Qualitative Disclosures about Market
      Risk
                
                
                27Item
      4.
                Controls and Procedures
                
                
                28PART II:
      OTHER INFORMATIONItem 1.
                Legal Proceedings
                
                
                29Item
      1A.
                Risk Factors
                
                
                29Item
      2.
                Unregistered Sales of Equity Securities and Use of
      Proceeds
                
                
                29Item
      3.
                Defaults upon Senior Securities
                
                
                29Item
      4.
                Submission of Matters to a Vote of Security
      Holders
                
                
                29Item
      5.
                Other Information
                
                
                29Item
      6.
                Exhibits
                
                
                29SignaturesEX-31.1:
                CERTIFICATION OF CEOEX-31.2:
                CERTIFICATION OF CFOEX-32.1:
                CERTIFICATION OF CEOEX-32.2:
                CERTIFICATION OF CFO
  
  1
 Table
of Contents
  PART I –FINANCIAL
INFORMATION
 
 Item
1.   Condensed Consolidated Financial
Statements
  NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
  June
      21, 2009
                
                
                March
      29, 2009ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                3,653,989
                
                
                $
                2,584,740Accounts
      receivable, net of allowance for doubtful accounts of $4,027,913 and
      $3,948,460, respectively
                
                
                13,452,032
                
                
                
                12,063,799Inventories
                
                
                2,092,665
                
                
                
                2,849,917Prepaid
      expenses and deferred charges
                
                
                2,771,209
                
                
                
                3,332,139Deferred
      tax assets
                
                
                1,590,109
                
                
                
                1,595,511Income
      tax receivable
                
                
                4,214,426
                
                
                
                3,292,455Other
      current assets
                
                
                138,577
                
                
                
                59,487Total
      current assets
                
                
                27,913,007
                
                
                
                25,778,048Property,
      equipment and computer software, net
                
                
                23,283,735
                
                
                
                23,658,481Goodwill
                
                
                188,742,864
                
                
                
                188,531,513Deferred
      financing costs, net
                
                
                5,576,798
                
                
                
                5,959,080Intangible
      assets, net
                
                
                125,168,210
                
                
                
                128,512,560Other
      assets
                
                
                385,439
                
                
                
                417,378Total
      noncurrent assets
                
                
                343,157,046
                
                
                
                347,079,012Total
      assets
                
                $
                371,070,053
                
                
                $
                372,857,060LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                
                $
                6,960,598
                
                
                $
                6,459,301Accrued
      compensation and related taxes
                
                
                1,283,140
                
                
                
                1,503,679Customer
      deposits
                
                
                1,029,585
                
                
                
                964,022Unearned
      revenue
                
                
                1,502,528
                
                
                
                1,332,484Accrued
      interest
                
                
                1,503,430
                
                
                
                6,682,405Other
      current liabilities
                
                
                86,699
                
                
                
                383,004Current
      maturities of long-term debt
                
                
                2,350,941
                
                
                
                2,350,941Current
      maturities of capital lease obligations
                
                
                320,671
                
                
                
                342,192Total
      current liabilities
                
                
                15,037,592
                
                
                
                20,018,028Long-term
      debt, less current maturities
                
                
                289,670,259
                
                
                
                282,693,343Capital
      lease obligations, less current maturities
                
                
                249,278
                
                
                
                322,269Deferred
      tax liabilities
                
                
                26,972,144
                
                
                
                27,294,034Other
      long-term liabilities
                
                
                3,137
                
                
                
                —Total
      liabilities
                
                
                331,932,410
                
                
                
                330,327,674Commitments
      and contingencies (Note 9)Stockholders’
      EquityCommon
      stock, $0.001 par value; 100 shares authorized, issued and
      outstanding
                
                
                —
                
                
                
                —Additional
      paid-in capital (including warrants of $533,583 at June 21, 2009 and March
      29, 2009)
                
                
                194,579,776
                
                
                
                194,579,776Accumulated
      deficit
                
                
                (155,381,162
                )
                
                
                (151,931,512
                )Accumulated
      other comprehensive loss, net of tax
                
                
                (60,971
                )
                
                
                (118,878
                )Total
      stockholders’ equity
                
                
                39,137,643
                
                
                
                42,529,386Total
      liabilities and stockholders’ equity
                
                $
                371,070,053
                
                
                $
                372,857,060
 
  See
      the accompanying notes to condensed consolidated financial
      statements.
 2
 Table
of Contents
  NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
  
  
  Three
      Periods EndedJune
      21, 2009
                
                
                June
      22, 2008Sales
                
                $
                35,848,651
                
                
                $
                48,450,049Cost
      of sales (exclusive of production depreciation and software amortization
      expense shown separately below)
                
                
                24,466,311
                
                
                
                32,715,723Production
      depreciation and software amortization
                
                
                1,276,018
                
                
                
                1,180,935Gross
      profit
                
                
                10,106,322
                
                
                
                14,553,391Selling,
      general and administrative expenses
                
                
                4,738,762
                
                
                
                5,778,088Nonproduction
      depreciation and software amortization
                
                
                448,330
                
                
                
                414,923Amortization
      of intangibles
                
                
                3,566,452
                
                
                
                4,031,402Operating
      income
                
                
                1,352,778
                
                
                
                4,328,978Other
      income (expense)Interest
      and dividend income
                
                
                9,908
                
                
                
                58,232Interest
      expense
                
                
                (6,756,409
                )
                
                
                (6,669,890
                )Other
      income
                
                
                21,364
                
                
                
                49,972Total
      other expense
                
                
                (6,725,137
                )
                
                
                (6,561,686
                )Loss
      before benefit from income taxes
                
                
                (5,372,359
                )
                
                
                (2,232,708
                )Income
      tax benefit
                
                
                (1,922,709
                )
                
                
                (666,469
                )Net
      loss
                
                $
                (3,449,650
                )
                
                $
                (1,566,239
                )
 
 
  See
      the accompanying notes to condensed consolidated financial
      statements.
 3
 Table
of Contents
  NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
   
 
 
 
 Common
      Stock
                      Shares                                    
      Amount
                  
                  
                  Additional
                      Paid-In
                      Capital
                  
                  
                  Accumulated
                      Deficit
                  
                  
                  Accumulated
                    Other
                    Comprehensive
                    (Loss)
      Income, net of tax
                  
                  
                  TotalBalance
      at March 29, 2009
                  
                  
                  100
                  
                  
                  $
                  —
                  
                  
                  $
                  194,579,776
                  
                  
                  $
                  (151,931,512
                  )
                  
                  $
                  (118,878
                  )
                  
                  $
                  42,529,386Comprehensive
      loss:Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (3,449,650
                  )
                  
                  
                  —
                  
                  
                  
                  (3,449,650
                  )Foreign
      currency translation adjustments, net of tax
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  57,907
                  
                  
                  
                  57,907Comprehensive
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,391,743
                  )Balance
      at June 21, 2009
                  
                  
                  100
                  
                  
                  $
                  —
                  
                  
                  $
                  194,579,776
                  
                  
                  $
                  (155,381,162
                  )
                  
                  $
                  (60,971
                  )
                  
                  $
                  39,137,643
 
  See
      the accompanying notes to condensed consolidated financial
      statements.
 4
 Table
of Contents
  NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 Three
      Periods EndedJune
      21, 2009
                    
                    
                    June
      22, 2008Cash
      flows from operating activitiesNet
      loss
                    
                    $
                    (3,449,650
                    )
                    
                    $
                    (1,566,239
                    )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activities:Deferred
      income taxes
                    
                    
                    (316,488
                    )
                    
                    
                    (1,365,111
                    )Other,
      net
                    
                    
                    6,997,582
                    
                    
                    
                    7,014,698Changes
      in operating assets and liabilities, net of acquired
      businesses
                    
                    
                    (6,508,899
                    )
                    
                    
                    (2,304,813
                    )Net
      cash (used in) provided by operating activities
                    
                    
                    (3,277,455
                    )
                    
                    
                    1,778,535Cash
      flows from investing activitiesPurchase
      of property, equipment and computer software
                    
                    
                    (1,245,050
                    )
                    
                    
                    (1,346,902
                    )Payments
      for businesses acquired, net of cash
                    
                    
                    —
                    
                    
                    
                    (30,487
                    )Net
      cash used in investing activities
                    
                    
                    (1,245,050
                    )
                    
                    
                    (1,377,389
                    )Cash
      flows from financing activitiesProceeds
      from revolving facility
                    
                    
                    6,000,000
                    
                    
                    
                    —Payments
      on term loan facility
                    
                    
                    (191,590
                    )
                    
                    
                    (191,590
                    )Payments
      on capital leases
                    
                    
                    (94,513
                    )
                    
                    
                    (114,659
                    )Payments
      of debt issuance costs
                    
                    
                    (122,143
                    )
                    
                    
                    —Net
      cash provided by (used in) financing activities
                    
                    
                    5,591,754
                    
                    
                    
                    (306,249
                    )Net
      increase in cash
                    
                    
                    1,069,249
                    
                    
                    
                    94,897Cash
      at beginning of fiscal year
                    
                    
                    2,584,740
                    
                    
                    
                    6,715,837Cash
      at end of period
                    
                    $
                    3,653,989
                    
                    
                    $
                    6,810,734Supplemental
      disclosurePayments
      for businesses acquired:Fair
      value of assets acquired
                    
                    $
                    —
                    
                    
                    $
                    —Less
      liabilities assumed
                    
                    
                    —
                    
                    
                    
                    —Total
      purchase price
                    
                    
                    —
                    
                    
                    
                    —Deferred
      purchase price
                    
                    
                    —
                    
                    
                    
                    30,487Cash
      paid for acquired businesses
                    
                    $
                    —
                    
                    
                    $
                    30,487Noncash
      investing and financing activitiesAssets
      acquired through capital lease
                    
                    $
                    —
                    
                    
                    $
                    63,559
  See
      the accompanying notes to condensed consolidated financial
      statements.
 5
 Table
of Contents
 NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  
  1.
              Organization
      and Basis of Presentation
  Network
Communications, Inc. (“NCI’’), and its wholly-owned subsidiaries, NCID, LLC and
other entities and Network Publications Canada, Inc. (“NCI-Canada’’)
(collectively “the Company’’) has its principal management, administrative and
production facilities in Lawrenceville, GA.  The Company is a
publisher, producing The Real
Estate Book (“TREB”), which is distributed in over 375 markets, the
District of Columbia, Puerto Rico, Virgin Islands, and Canada.  It
also produces the Apartment
Finder, New Home Finder, Mature Living Choices, Unique Homes Magazine, Enclave
Magazine, Black’s Guide, Kansas City Homes and Gardens, New England Home, Home by
Design, Homes and
Lifestyles magazines,regional home
improvement magazines, and other publications.  The Company also
provides its customers the opportunity to purchase related marketing services,
such as custom publishing and direct mail marketing.  Revenue is
primarily generated from advertising displayed in the Company’s print
publications and online versions of such publications.  The combined
online and print distribution provide a unique advantage in reaching real estate
and home design consumers.  Advertisers may also purchase enhanced
print or online listings for an additional fee.  Each market is
operated either by an Independent Distributor (“ID”) assigned a particular
market or by the Company.  NCI is a wholly-owned subsidiary of
Gallarus Media Holdings, Inc. (“GMH’’), and effective January 7, 2005, a
wholly-owned subsidiary of our ultimate parent, GMH Holding Company
(“GMHC’’).  On January 7, 2005, the majority of GMHC stock was
acquired by Citigroup Venture Capital Equity Partners, L.P. and its affiliated
funds (“CVC Fund”).  As a result of their stock acquisition of GMHC,
CVC Fund owns approximately 89% of GMHC’s outstanding capital
stock.  By virtue of their stock ownership, CVC Fund has significant
influence over our management and will be able to determine the outcome of all
matters required to be submitted to the stockholders for
approval.  CVC subsequently spun off from its former owner, Citigroup,
and the new entity was renamed Court Square Capital Partners (“Court
Square”).
  2.
              Summary
      of Significant Accounting Policies
  Basis
of Presentation
  The
accompanying financial statements represent the condensed consolidated
statements of the Company and its wholly owned subsidiaries.  The
Company and its consolidated entities report on a 52-53 week accounting year
which ends on the last Sunday of March of that year and includes 13 four-week
periods.  Fiscal quarters 1, 2 and 3 each include 12 weeks; fiscal
quarter 4 includes 16 weeks or 17 weeks.  The condensed consolidated
financial statements include the financial statements of the Company for the
three periods ended June 21, 2009 and the three periods ended June 22,
2008.  All significant intercompany balances and transactions have
been eliminated in consolidation.
  The
year-end condensed consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of
America.
  The
accompanying interim condensed consolidated financial statements for the three
periods ended June 21, 2009 and June 22, 2008 are
unaudited.  Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America for financial information
have been condensed or omitted pursuant to the rules and regulations of Article
10 of SEC Regulation S-X.  In the opinion of management, these
condensed consolidated financial statements contain all adjustments, consisting
of normal recurring adjustments, necessary to state fairly the financial
position, results of operations and cash flows for the periods
indicated.  Operating results for the three periods ended
June 21, 2009 are not necessarily indicative of results that may be
expected for any other future interim period or for the fiscal year ending March
28, 2010.  You should read the unaudited condensed consolidated
financial statements in conjunction with NCI’s consolidated financial statements
and accompanying notes included in the Company’s Annual Report on Form 10-K for
the fiscal year ended March 29, 2009 filed with the SEC on June 19,
2009.
   6
 Table
of Contents
 NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Fair
Value of Financial Instruments
 
 The fair
values of the Company’s financial assets and liabilities at June 21, 2009 and
March 29, 2009, equal the carrying values reported on the Consolidated Balance
Sheets except for the new senior secured term loan facility entered into on July
20, 2007 (the “new term loan facility”), the10 3⁄4% senior notes (“senior
notes”) and the senior subordinated note. The fair values of the new term loan
facility and senior notes are based on quoted market values. The fair value of
the new term loan facility was $42.3 million and $42.4 million as compared to
the carrying values of $70.5 million and $70.7 million as of June 21, 2009 and
March 29, 2009, respectively. The fair value of the senior notes was $34.4
million and $24.7 million as compared to the carrying amounts of
$175.0 million and $175.0 million as of June 21, 2009 and
March 29, 2009, respectively.  The senior subordinated note does
not trade in a market so the fair value is based on appropriate valuation
methodologies including option model and liquidation analyses.  The
fair value of the senior subordinated note was $6.0 million and $6.0 million as
compared to the carrying amounts of $42.0 million and $40.9 million as of June
21, 2009 and March 29, 2009, respectively.
 
 Derivative
Instruments
 
 SFAS No. 133,
“Accounting for Derivative
Instruments and Hedging Activities”, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. This statement requires
the recognition of all derivative instruments as either assets or liabilities in
the balance sheet measured at fair value. The changes in fair value of
derivative instruments are recognized as gains or losses in the period of
change. SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”which was effective for the Company
in the fourth quarter of fiscal year 2009, requires enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS 133 and its
related interpretations, and (c) how derivative instruments and related hedged
items affect an entity's financial position, financial performance, and cash
flows.
 
 Occasionally,
the Company enters into foreign currency forward contracts whereby the Company
agrees to sell on a certain date Canadian Dollars in exchange of US Dollars at a
pre-determined foreign exchange rate. The Company has not elected to use hedge
accounting to record these contracts. The Company executes the contract on the
expiry date and the related gain or loss is recorded in its statement of
operations under the selling, general and administrative expenses during the
period the contract expires. The Company uses these contracts to minimize the
foreign currency fluctuation risk resulting from activities of its subsidiary,
Network Publications Canada, Inc (NCI-Canada). As of June 21, 2009, the Company
has three forward contracts outstanding consisting of $0.2 million, $0.5 million
and $0.5 million expiring on July 1, 2009, October 1, 2009 and December 31,
2009, respectively. In addition, the Company recorded $0.04 million of loss
related to foreign currency forward contracts executed during the first quarter
of fiscal year 2010 in its statement of operations for the three periods ended
June 21, 2009 under the selling, general and administrative expenses
line.
 
 Subsequent
events
 
 In
the first quarter of fiscal year 2010, the Company adopted the provisions of
SFAS 165, “Subsequent
Events” which require entities to disclose the date through which
subsequent events have been evaluated, as well as whether that date is the date
the financial statements were issued or the date the financial statements were
available to be issued. Accordingly, the Company evaluated, for potential
recognition and disclosure, events that occurred prior to the filing of the
Company’s Quarterly Report on Form 10-Q for the three periods ended
June 21, 2009 on August 4, 2009.
 
 Recent
Accounting Pronouncements
 
 In May
2009, The Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 165, Subsequent Events (“SFAS
165”). This statement establishes general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  It requires
the disclosure of the date through which an entity has evaluated subsequent
events and whether that evaluation date is the date of issuance or the date the
financial statements
were available to be issued. SFAS 165 is effective for interim and annual
periods ending after June 15, 2009 and as such, the Company adopted this
standard in the first quarter of fiscal year 2010 and the adoption had no impact
on its financial position, results of operations or cash
flows.
  7
 Table
of Contents
 NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  
 In April
2009, the FASB issued FASB staff position (“FSP”) FAS 107-1, “Disclosures about Fair Value of
Financial Instruments”(“FSP 107-1”). The staff position increases the
frequency of the disclosures related to the fair value of financial instruments
required by public entities to a quarterly basis rather than just annually. The
quarterly disclosures are intended to provide financial statement users with
more timely information about the effects of current market conditions on an
entity’s financial instruments that are not otherwise reported at fair value.
FSP 107-1 is effective for interim and annual periods ending after June 15,
2009, with early adoption permitted in certain circumstances for periods ending
after March 15, 2009. The Company adopted this FSP in the first quarter of
fiscal year 2010 and the adoption had no impact on its financial position,
results of operations, or cash flows.
 
 In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP FAS 142-3 amends the factors an
entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under SFAS 142,
“Goodwill and Other Intangible
Assets”. This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets in business
combinations and asset acquisitions. FSP FAS 142-3 is effective for financial
statements issued for fiscal years and interim periods beginning after December
15, 2008.  Early adoption is prohibited.  The Company
adopted FSP FAS 142-3 in the first quarter of fiscal year 2010 and the adoption
did not have any material impact on its financial position, results of
operations, or cash flows.
 
 In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”), which amends the
disclosure requirements of SFAS 133. SFAS 161 provides an enhanced understanding
about how and why derivative instruments are used, how they are accounted for
and their effect on an entity’s financial position, performance and cash flows.
SFAS 161, which is effective for the first interim period beginning after
November 15, 2008, will require additional disclosure in future filings.
The Company adopted this standard in the fourth quarter of fiscal year 2009 and
the adoption did not have any material impact on the Company’s consolidated
financial position, results of operations, or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an Amendment of ARB No. 51(“SFAS 160”). SFAS 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
160 is effective for fiscal years beginning on or after December 15, 2008
and as such, the Company adopted this standard in the first quarter of fiscal
year 2010 and the adoption did not have any material impact on its financial
position, results of operations, or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations(“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations in a number of areas including the treatment of
contingent consideration, contingencies, acquisition costs, IPR&D and
restructuring costs. In addition, under SFAS 141R, changes in deferred tax
asset valuation allowances and acquired income tax uncertainties in a business
combination after the measurement period will impact income
taxes.  SFAS 141R is effective for fiscal years beginning after
December 15, 2008 and, as such, the Company adopted this standard in the
first quarter of fiscal year 2010. The provisions are effective for the Company
for business combinations on or after March 30, 2009.
 
 Effective
March 26, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement 109(“FIN 48”). FIN 48 requires
that a position taken or expected to be taken in a tax return be recognized in
the financial statements when it is more likely than not (i.e. a likelihood of
more than fifty percent) that the position would be sustained upon examination
by tax authorities. A recognized tax position is then measured at the largest
amount of benefit that is greater than fifty percent likely of being realized
upon ultimate settlements. Upon adoption, the Company did not have any material
uncertain tax positions to account for as an adjustment to its opening balance
of retained earnings on March 26, 2007. In addition, as of June 21, 2009
and March 29, 2009, the Company did not have any material unrecognized tax
benefits.
  8
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 NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an Amendment of FASB Statement
No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. This
provides entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
being required to apply complex hedge accounting provisions. The provisions of
SFAS 159 are effective as of the beginning of fiscal years that start after
November 15, 2007. The Company adopted SFAS 159 on March 31, 2008 and the
adoption did not have any material impact on its financial position, results of
operations, or cash flows.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 emphasizes that fair value
is a market-based measurement, not an entity-specific measurement, and states
that a fair value measurement should be determined based on the assumptions that
market participants would use in pricing the asset or liability.  SFAS
157 applies under other accounting pronouncements that require or permit fair
value measurements.
 
 SFAS 157,
among other things, requires companies to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value, and
specifies a hierarchy of valuation techniques based on whether the inputs to
those valuation techniques are observable or unobservable. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs
reflect the company’s market assumptions. The effective date is for fiscal years
beginning after November 15, 2007.
  SFAS 157
establishes a three-tiered hierarchy to prioritize inputs used to measure fair
value. Those tiers are defined as follows:
  -
              Level
      1 inputs are quoted prices (unadjusted) in active markets for identical
      assets or liabilities that the reporting entity has the ability to access
      at the measurement date.
  -
              Level
      2 inputs are inputs, other than quoted prices included within Level 1,
      that are observable for the asset or liability, either directly or
      indirectly. If the asset or liability has a specified (contractual) term,
      a Level 2 input must be observable for substantially the full term of the
      asset or liability.
  -
              Level
      3 inputs are unobservable inputs for the asset or
    liability.
 
 The
highest priority in measuring assets and liabilities at fair value is placed on
the use of Level 1 inputs, while the lowest priority is placed on the use of
Level 3 inputs.
  This
statement also expands the related disclosure requirements in an effort to
provide greater transparency around fair value measures.
 
 As of
March 31, 2008, the Company adopted SFAS 157, and the adoption did not have a
material impact on the Company’s financial position, results of operations, or
cash flows.
 
 In
February 2008, the FASB issued FSP FAS 157-2, which delays the effective date of
SFAS 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years, for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).  The
Company adopted FSP FAS 157-2 in the first quarter of fiscal year 2010 and the
adoption did not have any material impact on the Company’s financial position,
results of operations on cash flows.
 
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 NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  3.
              Inventories
  At June
21, 2009 and March 29, 2009, inventories consisted of the
following:
 
 June
      21, 2009
                  
                  
                  March
      29, 2009Distribution
      products and marketing aids for resale
                  
                  $
                  246,769
                  
                  
                  $
                  274,683Production,
      paper and ink
                  
                  
                  1,360,361
                  
                  
                  
                  2,057,004Work-in-process
                  
                  
                  485,535
                  
                  
                  
                  518,230Total
                  
                  $
                  2,092,665
                  
                  
                  $
                  2,849,917
 
  4.
              Acquisitions
  Generally,
whenever an acquisition is completed, the Company pays a premium over the fair
value of the net tangible and identified intangible assets acquired to fulfill
the Company’s strategic initiatives and to ensure strategic fit with its current
publications.  The majority of the Company’s transactions are asset
based in which the Company acquires the publishing assets associated with the
products purchased that fit our predetermined criteria as an expansion of our
geographical footprint, addition to market share in certain areas or
complementary services to our existing customers.  The Company
evaluates each asset purchased on an individual basis for fit with our
organization based on its historical performance along with our expectations for
growth.  The strength of each criteria and the expected return on our
investment are evaluated in developing the purchase price.
  Allocation
of Purchase Price
  The
application of purchase accounting under SFAS 141 requires that the total
purchase price be allocated to the fair value of assets acquired and liabilities
assumed based on their fair values at the acquisition date.  The
allocation process requires an analysis of acquired contracts, customer
relationships, contractual commitments and legal contingencies to identify and
record the fair value of all assets acquired and liabilities
assumed.  In valuing acquired assets and assumed liabilities, fair
values are based on, but not limited to: future expected cash flows; current
replacement cost for similar capacity for certain fixed assets; market rate
assumptions for contractual obligations; settlement plans for litigation and
contingencies; and appropriate discount rates and growth
rates.  Goodwill represents the excess of the purchase price over the
fair value of the net assets of the acquired business.  Goodwill,
which is tax deductible, resulting from the acquisitions is assigned to the
Company’s one business segment.  The Company adopted SFAS 141R in the
first quarter of fiscal year 2010 and will apply the provisions on acquisitions
completed in the future.
  During
the three periods ended June 21, 2009, the Company acquired the publishing
assets of The Real Estate
Book in the Mid-Atlantic region for which consideration did not involve
cash.  The total purchase price was $0.4 million of which $0.2 million
was recorded to goodwill.  In addition, the Company did not complete
any acquisitions during the three periods ended June 22, 2008.
  5.
              Goodwill
  
 As
disclosed in its annual report on Form 10-K filed with the SEC on June 19, 2009,
the Company had a triggering event under SFAS 142 in the third quarter of fiscal
year 2009.  As a result, the Company performed an impairment test of
its goodwill and indefinite-lived intangible assets under SFAS 142 and recorded
during the third and fourth quarters of fiscal year 2009 a total impairment loss
of $119.5 million. For further details, refer to the Company’s recent annual
report on Form 10-K for fiscal year 2009 filed with the SEC on June 19,
2009.
 
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 NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  The total
amount of goodwill on the Company’s books at June 21, 2009 and March 29, 2009
was $188.7 million and $188.5 million, respectively.
 
 Balance,
      March 30, 2008
                  
                  $
                  306,518,991Fiscal
      year 2009 additions
                  
                  
                  1,534,555Impairment
      loss
                  
                  
                  (119,522,033
                  )Balance,
      March 29, 2009
                  
                  
                  188,531,513Current
      year additions
                  
                  
                  211,351Balance,
      June 21, 2009
                  
                  $
                  188,742,864
 
  6.
              Comprehensive
      Loss
   Comprehensive
loss includes reported net loss, and foreign currency translation adjustments,
net of tax. The following table shows NCI’s comprehensive loss for the three
periods ended June 21, 2009 and June 22, 2008:
 
 Three
      Periods Ended(Dollars
      in thousands)
                  
                  June 21 2009
                  
                  
                  June 22, 2008Net
      loss
                  
                  $
                  (3,450
                  )
                  
                  $
                  (1,566
                  )Foreign
      currency translation adjustments, net of tax
                  
                  
                  58
                  
                  
                  
                  (3
                  )Comprehensive
      loss
                  
                  $
                  (3,392
                  )
                  
                  $
                  (1,569
                  )
 
  7.
              Income
      Taxes
  The
following table sets forth the income tax benefit and effective tax rate for the
three periods ended June 21, 2009 and June 22, 2008:
 
 Three
      Periods Ended(Dollars
      in thousands)
                  
                  June 21, 2009
                  
                  
                  June 22, 2008Income
      tax benefit
                  
                  $
                  (1,923
                  )
                  
                  $
                  (666
                  )Effective
      tax rate
                  
                  
                  35.8
                  %
                  
                  
                  29.9
                  %
 
  Income
tax benefit consists of current and deferred income taxes.  The
difference in effective income tax rates is due primarily to the impact of
nondeductible expenses relative to the level of net loss before taxes between
the two periods.  Also, the Company has nondeductible expenses related
to meals and entertainment and certain interest expenses related to senior
subordinated debt.  The Company is subject to taxation in the United
States of America (for federal and state) and Canada.
   11
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COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  8.
              Long-Term
      Debt
  At June
21, 2009 and March 29, 2009, long-term debt consisted of the
following:
  June
      21, 2009
                
                
                March
      29, 200910
      3⁄4% Senior Notes, due December 1, 2013
                
                $
                175,000,000
                
                
                $
                175,000,000New
      Senior Term loan facility
                
                
                70,525,934
                
                
                
                70,717,523New
      Revolving loan facility
                
                
                6,000,000
                
                
                
                —Senior
      Subordinated Note
                
                
                42,024,724
                
                
                
                40,937,992Total
      long-term debt
                
                
                293,550,658
                
                
                
                286,655,515Less:Unamortized
      discount on Senior Notes
                  and Senior Subordinated
      Note
                
                
                (1,529,458
                )
                
                
                (1,611,231
                )Current
      maturities
                
                
                (2,350,941
                )
                
                
                (2,350,941
                )Long-term
      debt, less current maturities
                
                $
                289,670,259
                
                
                $
                282,693,343
 
  For a
discussion of certain of our debt characteristics, see “Note 13.
Long-term Debt”of the Notes to Consolidated Financial Statements section
of our annual report on Form 10-K for the fiscal year ended
March 29, 2009. Other than the items noted below, there have been no
significant developments since March 29, 2009.
 
 New
Senior Credit Facility
 
 On July
20, 2007, the Company entered into the new term loan facility for an aggregate
principal amount of $76.6 million and a senior secured revolving loan facility
(the “new revolving loan facility”) for an amount up to $35.0 million (the new
term loan facility together with the new revolving loan facility; the “new
credit facility”). The proceeds of the new credit facility were used to repay
all amounts outstanding under the Company’s prior credit facility (dated as of
November 30, 2005) and fund acquisitions during the Company’s second quarter of
fiscal year 2008. In connection with the new credit facility, the Company
recorded $0.5 million of deferred charges during the second quarter of fiscal
year 2008 for transaction fees and other related debt issuance
costs.  Additionally, approximately $3.7 million of debt issuance
costs associated with the extinguishment of the existing term loan facility were
written off and charged to interest expense during the second quarter of fiscal
year 2008.
 
 On June
10, 2008, the Company amended the new revolving loan facility dated July 20,
2007.  The amendment adjusted the interest coverage ratios over the
term of the new revolving loan facility.
 
 On
December 4, 2008, the Company amended the new revolving loan facility dated July
20, 2007.  The amendment adjusted the amount payable to employees and
other individuals in connection with the repurchase of equity interests held by
such individuals or upon the termination of employment of an individual in
connection with the repurchase of stock appreciation rights or other similar
interests, adjusted the interest coverage ratio and the senior secured leverage
ratio and eliminated the Company’s ability to carry forward any unused permitted
investments in respect of unrestricted subsidiaries.
 
 On May 4,
2009, the Company amended the new revolving loan facility dated
July 20, 2007. The amendment restated the applicable percentage as
defined in the revolving credit agreement, increased the commitment fee from
0.50% to 0.75%, decreased the revolving credit commitment from
$35.0 million to $15.0 million, decreased the permitted annual capital
expenditures from $10.0 million to $6.0 million, and adjusted the interest
coverage ratio and the senior secured coverage ratio on the revolving facility.
In connection with the amendment, the Company wrote off $0.2 million for debt
issuance costs associated with the prior revolving facility dated July 20, 2007
and recorded $0.2 million for debt issuance costs associated with the new
amended facility, of which $0.1 million was paid as of June 21,
2009.
 
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COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Under the
new credit facility, the Company has the option to borrow funds at an interest
rate equal to the London Interbank Offered Rate (“LIBOR”) plus a margin or at
the lender’s base rate (which approximates the Prime rate) plus a margin.
Interest rates under the new term loan facility are base rate plus a margin of
1.50% or LIBOR plus a margin of 2.00%. Interest rates under the new revolving
loan facility are base rate plus a margin ranging from 2.50% to 1.75% or LIBOR
plus a margin ranging from 3.50% to 2.75%. The applicable margin payable on the
new revolving loan facility is subject to adjustments based upon a
leverage-based pricing grid.  The new credit facility requires the
Company to meet maximum leverage ratios and minimum interest coverage ratios and
includes a maximum annual capital expenditures limitation.  In
addition, the new credit facility contains certain restrictive covenants which,
among other things, limit our ability to incur additional indebtedness, pay
dividends, incur liens, prepay subordinated debt, make loans and investments,
merge or consolidate, sell assets, change our business, amend the terms of our
subordinated debt and engage in certain other activities customarily restricted
in such agreements.  It also contains certain customary events of
defaults, subject to grace periods, as appropriate.
 
 The new
revolving facility contains a cross default provision to other indebtedness in
excess of $5.0 million whereby payment defaults on such other indebtedness
result in cross default under the new revolving facility.  Covenant
defaults under such other indebtedness do not result in a cross default under
the new revolving facility until expiration of any relevant grace periods as set
forth under such other indebtedness.
 
 The new
term loan facility contains a cross default provision to other indebtedness in
excess of $7.5 million whereby payment defaults or covenant defaults on such
other indebtedness are, subject to certain exceptions, cure periods and grace
periods as set forth in the new term loan facility agreement, cross defaults
under the new term loan facility.
 
 The new
credit facility is collateralized by substantially all of the assets of NCI and
its subsidiaries. In addition, NCI’s subsidiaries are joint and several
guarantors of the obligations. The new credit facility loan agreements contain
certain restrictive provisions which include, but are not limited to, requiring
the Company to maintain certain financial ratios and limits upon the Company’s
ability to incur additional indebtedness, make certain acquisitions or
investments, sell assets or make other restricted payments, including dividends
(as defined in the new term loan credit facility).
 
 The
Company’s new credit facility contains a subjective acceleration clause in which
certain events of default, as detailed in the new credit facility agreement,
will result in acceleration of the call date of the new credit facility.
Management reviews these events on a regular basis and believes that the Company
currently has not triggered any of these events.
 
 As of
June 21, 2009, under the most restrictive covenants as defined in the new
revolving loan facility, the Company was required to maintain a minimum interest
coverage ratio, as defined in the new revolving loan agreement, of 1.10 to
1.00.  The maximum allowable senior secured debt leverage ratio, as
defined in the new revolving loan agreement, is 3.00 to 1.00.  As of
June 21, 2009, the Company was in compliance with all of the financial covenants
of its new revolving loan agreement.
 
 The
Company had $70.5 million outstanding under the new term loan facility with
no availability to borrow at June 21, 2009.  Also, as of the fiscal
quarter end, the Company had a $6.0 million outstanding balance under the new
revolving facility with $9.0 million available to borrow, subject to the Company
maintaining compliance with the facility covenants.  The interest rate
at June 21, 2009 for the new revolving loan facility was at a rate of base plus
2.50% and/or LIBOR plus 3.50%. The effective interest rate on the balances
outstanding under the new term loan facility was 3.6% at June 21,
2009.
 
 The final
repayment of any outstanding amounts under the new revolving loan facility is
due November 30, 2010. The new term loan facility commenced
amortization in quarterly installments of $0.192 million beginning
December 31, 2007 through September 30, 2012. The final settlement of any
outstanding amounts under the new term loan facility is due November 30,
2012.
 
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COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Under the
new credit facility, the Company may obtain additional funding through
incremental loan commitments in an amount not to exceed $75.0 million
provided that the Company remains in compliance with its financial covenants on
a pro forma basis. As of June 21, 2009, there were no borrowings against the
incremental loan facility.
 
 In
addition to providing fixed principal payment schedules for the new credit
facility, the loan agreement also includes an excess cash flow repayment
provision that requires repayment of principal based on the Company’s leverage
ratio, EBITDA, working capital, debt service and tax payments. The excess cash
flow amount is calculated and paid annually with the repayment of principal
allocated on a pro rata basis to the new term and revolving loan
facilities.
 
 Based on
the Company’s financial results for the fiscal year ended March 29, 2009, the
Company determined that a payment of approximately $1.6 million during fiscal
year 2010 under the Excess Cash Flow Repayment Provision of the new term loan
facility was required. This payment was made on June 29, 2009 and accordingly,
was included in the current maturities of long-term debt as of June 21, 2009 and
March 29, 2009. The Company is also required to pay an annual non-utilization
fee equal to 0.75% of the unused portion of the revolving credit
facility.
  9.
              Commitments
      and Contingencies
  Operating
Leases
  The
Company is obligated under noncancellable operating leases and leases for office
space which expire at various dates through 2015.  Certain of the
leases require additional payments for real estate taxes, water and common
maintenance costs.
  Employment
Agreements
  Two
senior executives of the Company have employment agreements which terminate in
January 2010.  Pursuant to the agreements, the executives are entitled
to annual base salaries and annual bonuses based on the Company’s EBITDA for
each year.  These agreements also provide for severance benefits equal
to two years’ base salary and benefits upon termination of employment by the
Company without cause.
  Other
 
 The
Company is involved in various claims and lawsuits which arise in the normal
course of its business. Management does not believe that any of these actions
will have a material adverse effect on the Company's financial position, results
of operations, or cash flows.
 
 10.    Related
      Party Transactions
  In
December 2004, the Company entered into a 10-year advisory agreement with CVC
Management LLC (“CVC”), an affiliate of CVC Fund, now known as Court Square
Capital Partners (“Court Square”), whereby the Company pays an annual advisory
fee to Court Square.  The advisory fee is equal to the greater of
$0.21 million or 0.016% of the prior fiscal year advisory consolidated
revenue.  On July 31, 2006, Court Square Advisor, LLC, was assigned
the right to receive the fees payable by the Company pursuant to the advisory
agreement between CVC Management LLC, and NCI.  Under this agreement,
the Company made no payments during the three periods ended June 21, 2009 and
paid $0.05 million in the three periods ended June 22, 2008.  The
Company accrued $0.26 million and $0.21 million for management fees as
of June 21, 2009 and March 29, 2009, respectively.  Court Square
Advisor suspended collection of all advisory fees effective September
2008.  We continue to accrue the advisory fees.
   14
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COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  The
Company has retained TMG Public Relations (“TMG”) to perform public relations
and marketing services on its behalf on a project-by-project
basis.  TMG is owned by the spouse of Daniel McCarthy, NCI’s Chairman
and Chief Executive Officer.  The Company made payments to TMG of
$0.09 million and $0.02 million during the three periods ended June
21, 2009 and June 22, 2008, respectively.  The Company accrued
$0.03 million and $0.02 million for services rendered as of June 21,
2009 and March 29, 2009, respectively.  The Company expects to
continue to use the services of TMG during the remainder of fiscal year
2010.
  Effective
July 31, 2007, the Company entered into an agreement with L&S Graphics,
which is a digital printing company owned by Brandon Lee, one of the Company’s
employees who performs the role of the general manager of By Design. The Company
agreed to utilize L&S Graphics for all digitally printed materials related
to the “By Design” products. L&S Graphics was later renamed “Digital
Lizard”. Under this agreement, the Company made payments of $0.31 million
and $0.43 million during the three periods ended June 21, 2009 and June 22,
2008 and accrued for $0.08 million and $0.04 million as of June 21,
2009 and March 29, 2009, respectively.
 
 Effective
July 31, 2007, the Company entered into an office lease agreement with
MB&K, LLC which is owned by the same company employee noted in the prior
paragraph. Under this agreement, the Company made payments of $0.03 million
and $0.02 million during the three periods ended June 21, 2009 and June 22,
2008, respectively and recorded no accruals as of June 21, 2009 and
March 29, 2009, as the Company has met all its financial obligations under this
agreement.
 
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COMMUNICATIONS, INC. AND SUBSIDIARIES
 PART I –FINANCIAL INFORMATION
 
 Item2.   Management’s Discussion and Analysis of
Financial Condition and Results of Operations
  Cautionary
Statement Regarding Forward-Looking Information
  The
following Management’s Discussion and Analysis of our Financial Condition and
Results of Operations should be read in conjunction with the condensed
consolidated financial statements and notes thereto included as part of this
Form 10-Q. This report contains forward-looking statements that are based upon
current expectations. We sometimes identify forward-looking statements with such
words as “may”, “will”, “expect”, “anticipate”, “estimate”, “seek”, “intend”,
“believe” or similar words concerning future events. The forward-looking
statements contained herein, include, without limitation, statements concerning
future revenue sources and concentration, gross profit margins, selling, general
and administrative expenses, capital resources, additional financings or
borrowings and the effects of general industry and economic conditions; and are
subject to risks and uncertainties including, but not limited to, those
discussed below and elsewhere in this Form 10-Q that could cause actual results
to differ materially from the results contemplated by these forward-looking
statements. We also urge you to carefully review the risk factors set forth in
other documents we file from time to time with the SEC.
  Overview
of Operations
  We are a
Georgia corporation that was formed in 1980.  The following discussion
and analysis is based upon our unaudited interim condensed consolidated
financial statements and our review of our business and
operations.  Furthermore, we believe the discussion and analysis of
our financial condition, results of operations, and cash flows as set forth
below are not indicative nor should they be relied upon as an indicator of our
future performance.  The following discussion includes a comparison of
our results of operations for the three periods ended June 21, 2009 to the three
periods ended June 22, 2008.
  We have
13 four-week reporting periods in each fiscal year.  Our fiscal year
refers to the 52-53 week accounting year ended on the last Sunday of March of
that year.  The first, second and third quarters each contain 3
periods, or 12 weeks each, and the fourth quarter contains 4 periods, or 16
weeks.  In the 53-week accounting year, the fourth quarter contains 17
weeks.
  We are
one of the largest and most diversified publishers of information for the local
real estate market in North America.  Through our extensive
proprietary network of online and print distribution points, we provide critical
local information to consumers involved in buying, leasing and renovating a
home.  Our reader base selects our print and online publications
almost exclusively for the extensive advertisements, and, as a result, we are
able to provide high quality leads at an effective cost to our advertisers,
which are comprised of real estate agents, property management companies, new
home builders and home renovation product and service providers.  In
fiscal year 2009, we believe that we generated over ten million leads for our
advertisers.  We operate in over 550 targeted markets which may
overlap geographically across the U.S. and Canada.  The predominant
content in our publications is advertisements, and our two largest publications
are 100% advertisement based.  In the resale and new sales home
market, our flagship brand, The Real Estate Book
(“TREB”), is the largest real estate advertising publication in North
America.  In the rental and leasing market, we provide residential and
commercial leasing listings, primarily through Apartment Finder and Black’s Guide.  In
the home design and home improvement market, we are the largest publisher of
local and regional design magazines for the luxury market, including Kansas City Homes &
Gardens, Atlanta Homes
& Lifestyles, Colorado Homes & Lifestyles,
Mountain Living and New
England Home.
  We
distribute our printed publications through an extensive rack distribution
network, comprised of  high traffic locations in areas frequented by
our target consumers.  In addition, we maintain more than 30,000
uniquely shaped proprietary sidewalk distribution boxes.  For those
products targeting affluent consumers and businesses, we utilize sophisticated
database management and customer acquisition tools in order to develop highly
targeted direct mail distribution.  We also distribute all of our
content — including our database of more than 1.8 million homes and apartments —
online to our advertisers.  We maintain a proprietary online network
which has over two million unique visitors each month.  In addition,
we distribute our content to over twenty online distribution partners, including
Trulia and BobVila.com with a monthly reach of over 47 million online
users.  We believe our combined online and print distribution network,
which is provided to advertisers at one all-inclusive cost, drives exceptional
results for our advertisers.
   16
 Table
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  We have
two marketing channels through which we generate revenue, the Independent
Distributor (“ ID”) channel and the Direct channel.  In our ID
channel, the independent distributor is responsible for selling the advertising,
collecting listings from agents/brokers and distributing publications in a
specific geographic market.  In our Direct channel, we sell the
advertising, collect the listings from the agents/brokers and create, print and
distribute the publications.
  As of
June 21, 2009, we had 797 employees, 375 of which were located at our corporate
headquarters and production facility in Lawrenceville, Georgia, a suburb of
Atlanta.
  We
believe the key drivers of financial performance are:
  ·
              advertising
      volume;
  ·
              expansion
      into other local real estate
markets;
  ·
              strong
      brand recognition; and
  ·
              per
      unit cost to produce our
publications.
  Business
Trends
 
 Real
estate market conditions continue to change. Our management team focuses on
several key indicators – annual sales volume of existing homes and the months of
supply of unsold homes; the market tightness index compiled by the National
Multi Housing Council; the Remodeling Market Index compiled by the National
Association of Home Builders; interest rates and consumer
confidence.
 
 ·
              Sales volume of existing homes
      and months of supply of unsold homes – Indicators for the resale
      home market experienced some pick-up in the April 2009 to June 2009
      timeframe.  Existing home sales experienced monthly sequential
      gains in April, May and June.  The annualized rate of sales in
      June 2009 was 4.89 million units which was basically flat with 15% from
      June 2008.  Foreclosed and distressed properties continue to be
      a factor as they accounted for over 30% of sales in June.  The
      median home price in the June 2009 was $181,800, a decrease of 15% from
      the prior year.  The total inventory of unsold existing homes in
      June 2009 stood at 3.8 million units or 9.4 months of inventory based on
      the current sales pace.  This compares favorably to June 2008
      when the number of unsold homes was 4.5 million or 11 months of
      inventory.
 
 ·
              The Market Tightness Index– The National Multi Housing Council’s (“NMHC”) market tightness
      index in April 2009 stood at 16, an increase from 11 in January
      2009.  A reading above 50 indicates that markets are
      experiencing higher occupancy rates and higher rental
      rates.  During the first quarter of 2009, the U.S. Census Bureau
      vacancy rate for all rental apartments rose to 11.5%, the highest vacancy
      rate since the fourth quarter of 2004.  The national vacancy
      rate for investment grade apartments in the first quarter of 2009 was
      7.6%.  The comparable vacancy rate in the first quarter of 2008
      was 5.8%.  During the first quarter of 2009, same store rents
      for professionally managed apartments declined by 2.8%, the biggest
      decline in fifteen years.  Multi family housing trends have
      historically been correlated to the employment market and job
      growth.  The increase in vacancy rates and the drop in rents are
      being driven by the overall downturn in the economy and the increase in
      the unemployment rate.
 
 ·
              The Remodeling Market
      Index (“RMI”) - The RMI rose
      to 34.5 in the first quarter of 2009 from a 25.5 reading in the fourth
      quarter of 2008.  This signaled a sequential improvement in the
      home remodeling market, however the index needs to register a reading of
      over 50 to signal that the majority of remodelers view market conditions
      as improving.  There was some upward movement in mortgage
      interest rates during the April 2009 to June 2009 period, however the main
      challenges as they relate to home remodeling business levels continue to
      be the availability of credit and the shrinking amount of home equity
      resulting from declining home
prices.
  17
 Table
of Contents
  Revenue
  Our
principal revenue earning activity is related to the sale of online and print
advertising by both ID as well as direct sales to customers through
Company-managed distribution territories.  Independent Distributors
are contracted to manage certain distribution territories on behalf of
NCI.  We maintain ownership of all magazines and distribution
territories.  Prepaid subscriptions are recorded as unearned revenue
when received and recognized as revenue over the term of the
subscription.
  Costs
  Operating
expenses include cost of sales; depreciation and amortization; and selling,
general and administrative expenses (“SG&A”).  Cost of sales
include all costs associated with our Georgia production facility, our
outsourced printing, which are the costs we pay to third party printers to print
books not printed in our Georgia production facility, our field sales
operations, field distribution operations and online operations and bad debt
expense.  SG&A expenses include all corporate departments,
corporate headquarters, and the management of the publications.
  Our
operating expense base consists of almost 75% fixed costs.  These
expenses relate to our production facility in Georgia, our national distribution
network and our sales management infrastructure.  The remaining 25% of
operating expenses are variable and relate to paper, ink, sales commissions,
performance-based bonuses, bad debt expense and third party production
expenses.  Costs related to our workforce are the largest single
expense item, accounting for almost 38% of our total operating expense
base.  The second largest expense item, which accounts for
approximately 18% of our total operating expense base, is the cost associated
with producing our publications.  We expect to be able to continue to
manage our expense growth to levels consistent with past years.
  Depreciation
and Amortization
  Depreciation
costs of computer, equipment and software relate primarily to the depreciation
of our computer hardware and software developed for internal use or purchased,
as well as property, plant and equipment.  The depreciation and
amortization of equipment and software associated with production is shown
separately from our cost of sales in our statement of operations.  The
amounts of depreciation and amortization expense related to production equipment
and software for the three periods ended June 21, 2009 and June 22, 2008 were
$1.3 million and $1.2 million, respectively.  Depreciation and
amortization expense related to nonproduction equipment and software is shown
separately from the selling, general and administrative expenses in our
statement of operations.  The amounts of depreciation and amortization
expense related to nonproduction equipment and software for the three periods
ended June 21, 2009 and June 22, 2008 were $0.4 million
each.  Depreciation for computer, equipment and software as well as
property, plant and equipment is calculated on a straight-line basis over the
expected useful life of the related asset class.  Leasehold
improvements and leased assets are amortized over the shorter of their estimated
useful lives or lease terms.
  Amortization
costs relate to the amortization of intangible assets.  Our two
largest intangible assets are our independent distributor agreements and
trademarks/trade names.  The valuation and lives of our larger
intangible assets (trademarks, trade names, independent distributors and
advertiser lists) were determined by identifying the remaining useful life of
the components of each asset combined with a reasonable attrition rate and a
reasonable expectation for increase in revenue by each
component.  Certain markets experience a lower attrition
rate.  This has contributed to intangible assets with lives in excess
of 15 years.  The related amortization is calculated on a
straight-line basis over the expected useful life of the intangible
asset.
  Interest
Income and Interest Expense
  Interest
income consists primarily of interest income earned on our cash balances and
interest earned on notes receivable.  Interest expense consists
primarily of interest on outstanding indebtedness, interest on capital leases,
amortization of deferred financing costs and amortization of debt
discounts.
   18
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of Contents
  
  Income
Taxes
  The
following table sets forth the income tax benefit and effective tax rate for the
three periods ended June 21, 2009 and June 22, 2008:
 
 Three
      Periods Ended(Dollars
      in thousands)
                  
                  June 21, 2009
                  
                  
                  June 22, 2008Income
      tax benefit
                  
                  $
                  (1,923
                  )
                  
                  $
                  (666
                  )Effective
      tax rate
                  
                  
                  35.8
                  %
                  
                  
                  29.9
                  %
 
 Income
tax benefit consists of current and deferred income taxes.  The
difference in effective income tax rates is due primarily to the impact of
nondeductible expenses relative to the level of net loss before taxes between
the two periods. Also, the Company has nondeductible expenses related to meals
and entertainment and certain interest expenses related to senior subordinated
debt.  We are subject to taxation in the United States of America (for
federal and state) and Canada.
  Results
of Operations
  The
following table sets forth a summary of our operations and percentages of total
consolidated revenue for the three periods ended June 21, 2009 and June 22,
2008.  Our three revenue areas are:  (i) resale and new
sales; (ii) rental and leasing; and (iii) remodeling and home
improvement.  The resale and sales area includes The Real Estate Book (“TREB”), New Home Finder, Unique Homes,andBy Design.  Our
rental/leasing area includes Apartment Finder, Mature Living Choices, and
Black’s
Guide.  Our remodeling and home improvement area includes all
of our home and design and home improvement publications.
 
 Three
      Periods EndedJune
      21, 2009
                
                
                June
      22, 2008(Dollars
      in thousands)
                
                Amount
                
                
                %
                
                
                Amount
                
                
                %Resale
      and new sales
                
                $
                12,749
                
                
                
                35.6
                %
                
                $
                22,407
                
                
                
                46.2
                %Rental
      and leasing
                
                
                19,111
                
                
                
                53.3
                %
                
                
                19,326
                
                
                
                39.9
                %Remodeling
      and home improvement
                
                
                3,989
                
                
                
                11.1
                %
                
                
                6,717
                
                
                
                13.9
                %Total
      revenue
                
                
                35,849
                
                
                
                100.0
                %
                
                
                48,450
                
                
                
                100.0
                %Costs
      and expenses:Cost
      of sales (including production depreciation and software
      amortization)
                
                
                25,742
                
                
                
                71.8
                %
                
                
                33,897
                
                
                
                70.0
                %Selling,
      general and administrative (including
      nonproduction  depreciation and software
      amortization)
                
                
                5,187
                
                
                
                14.5
                %
                
                
                6,193
                
                
                
                12.8
                %Amortization
      of intangibles
                
                
                3,567
                
                
                
                9.9
                %
                
                
                4,031
                
                
                
                8.3
                %Income
      from operations
                
                $
                1,353
                
                
                
                3.8
                %
                
                $
                4,329
                
                
                
                8.9
                %
 
  19
 Table
of Contents
  
 Three
Periods Ended June 21, 2009 Compared to Three Periods Ended June 22,
2008
  Revenue.  For the
three periods ended June 21, 2009, total consolidated revenue was $35.8 million
compared to $48.5 million for the three periods ended June 22,
2008.  This was a decrease of $12.7 million or 26.2%.  Our
resale and new sales area declined by $9.7 million or 43.3% from $22.4 million
in the three periods ended June 22, 2008 to $12.7 million in the three periods
ended June 21, 2009. Our rental and leasing showed a year-over-year revenue
decline of $0.2 million or 1.0% from $19.3 million in the three periods ended
June 22, 2008 to $19.1 million in the three periods ended June 21,
2009. Our remodeling and home improvement area decreased by $2.7 million or
40.3% from $6.7 million in the three periods ended June 22, 2008 to $4.0 million
in the three periods ended June 21, 2009.  The declines in the resale
and new sales area and the remodeling and home improvement areas were due to the
weak economic conditions in the real estate market. The decline in revenue in
the rental and leasing area is attributable to the decline in the ad page volume
for Black’s Guide and
Mature Living Choices
as a result of the slowdowns in the commercial real estate and new home markets,
respectively.
 
 TREB posted revenue of $9.1
million in the first quarter of fiscal year 2010 compared to $15.9 million
during the same period in fiscal year 2009 which was a decrease of $6.8 million,
or 42.8%.  The TREB ID sales channel had
revenue of $6.3 million in the first quarter of fiscal year 2010 compared to
$10.9 million during the same period of fiscal year 2009, a decrease of $4.6
million or 42.2%.  The decline is related to the deteriorating
conditions of the real estate market and some market
consolidations.  The TREB Direct sales channel had
a revenue decrease of $2.2 million or 44.0% from $5.0 million in the first
quarter of fiscal year 2009 to $2.8 million during the same period of fiscal
year 2010.  Unique
Homes had revenue of $1.2 million in the first quarter of fiscal year
2010 compared to $1.8 million in the same period of fiscal year 2009, a decrease
of $0.6 million or 33.3%.  The decrease correlates with the decline in
the turnover of luxury home sales.
  Apartment Finder revenue for
the three periods ended June 21, 2009 was $18.4 million compared to $18.1
million during the three periods ended June 22, 2008, an increase of $0.3
million or 1.7%.  We have increased ad pages in the majority of our
existing markets.  Black’s Guide revenue
decreased $0.3 million or 42.9% from $0.7 million in the first quarter of fiscal
year 2009 to $0.4 million during the same period of fiscal year 2010 due to
softness in the commercial real estate market.
  Our
remodeling and home improvement area produced revenue of $4.0 million in the
three periods ended June 21, 2009 compared to $6.7 million during the three
periods ended June 22, 2008, a decrease of $2.7 million or 40.3%.  The
decrease was the result of advertisers reducing their marketing expenditures in
response to the continued weak conditions in the job market, falling home prices
and reduced availability of credit.  Our publications in this area
include: Kansas City Homes
& Gardens, Accent Home & Garden, At Home In Arkansas, Relocating in Las
Vegas, New England Home, Relocating in St. Louis,regional Home
Improvement magazines, and the Homes & Lifestyles
magazines.
  Cost of
sales.  Cost of sales for the three periods ended June 21, 2009
was $24.5 million, a decrease of $8.2 million, or 25.1%, from $32.7 million
during the three periods ended June 22, 2008.  Labor expense, which is
our largest cost component, was $10.5 million in the three periods ended June
21, 2009 compared to $14.1 million during the three periods ended June 22, 2008,
a decrease of $3.6 million, or 25.5%.  Total commission and bonus
expense decreased by $0.8 million or 28.6% from $2.8 million in the first
quarter of fiscal year 2009 to $2.0 million during the same period of fiscal
year 2010 due to our revenue decline.  Paper expense decreased by $1.1
million or 26.2%, from $4.2 million in the three periods ended June 22, 2008 to
$3.1 million in the three periods ended June 21, 2009.  Our outsource
production expense for the current quarter was $1.3 million, a decrease of $0.9
million or 40.9% from the first quarter of fiscal year 2009 expense of $2.2
million.  The decrease in outsource production expense is attributable
to bringing outsourced books back in-house and the decrease in our
revenue.  Distribution expense decreased in the current fiscal quarter
by approximately $0.7 million or 26.9% compared to the same period in the prior
year primarily due to reduced spend with third party distribution
companies.  The expense of our E-business and online operations
decreased by $0.6 million or 37.5% from $1.6 million in the first quarter of
fiscal year 2009 to $1.0 million in the current quarter.  We were able
to achieve savings by restructuring our operations while continuing to invest in
online distribution.
  20
 Table
of Contents
  Production depreciation and software
amortization expense.  Production depreciation and amortization
expense in the three periods ended June 21, 2009 and June 22, 2008 were $1.3
million and $1.2 million, respectively, which was an increase of $0.1 million or
8.3%.  The increase was the result of equipment and software purchased
during the last three quarters of fiscal year 2009 and the first quarter of
fiscal year 2010 partially offset by software assets being fully depreciated
during the same period.
  Gross Profit.Our gross
profit decreased by $4.5 million or 30.8% from $14.6 million in the first
quarter of fiscal year 2009 to $10.1 million in the first quarter of fiscal year
2010. The decrease was mainly related to the decline in revenues of $12.7
million in the current quarter compared to the same period of the prior year
partially offset by a decrease in the cost of sales of $8.2 million. The gross
profit percentage for the current quarter was 28.2% compared to 30.0% in the
same period of the prior year. The decrease was mainly attributable to the
impact of the fixed costs on our cost of sales.
  Selling, general and administrative
expenses (“SG&A”).  SG&A expenses for the three periods
ended June 21, 2009 were $4.7 million compared to $5.8 million for the three
periods ended June 22, 2008, which was a decrease of $1.1 million or
19.0%.  Labor and related expenses in the three periods ended June 21,
2009 were $2.5 million, a decrease of $0.6 million, or 19.4%, from $3.1 million
during the same period in fiscal year 2008.  The decrease reflects a
reduction in headcount from cost reduction initiatives.  Legal and
professional fees decreased $0.1 million or 25.0% in the current quarter from
$0.4 million in the first quarter of fiscal year 2009 to $0.3 million in the
first quarter of fiscal year 2010.
  Nonproduction depreciation and
software amortization expense.Nonproduction depreciation and
software amortization expense remained flat at $0.4 million in the first quarter
of fiscal year 2010 compared to the same period of fiscal year
2009.
  Amortization of
intangibles.  Amortization expense was $3.6 million in the
three periods ended June 21, 2009, compared to $4.0 million for the three
periods ended June 22, 2008, a decrease of $0.4 million or 10.0%.  The
decrease was related to intangible assets fully depreciated during the last
fiscal year.
  Net interest
expense.  Net interest expense for the three periods ended June
21, 2009 was $6.7 million compared to the net interest expense of $6.6 million
during the three periods ended June 22, 2008.  The increase was
related to the write off of deferred financing fees in connection with the
amendment of May 4, 2009 of the new revolving agreement, and a higher level of
senior subordinated note offset by lower interest rates on our senior term loan
facility.
  Net loss.  Due to
the factors described above, we reported a net loss of $3.4 million during the
three periods ended June 21, 2009, compared to a net loss of $1.6 million during
the three periods ended June 22, 2008.
  Liquidity
and Capital Resources
  Historically,
our primary source of liquidity has been cash flow from
operations.  We also have the ability to incur indebtedness under our
senior secured revolving loan facility. At June 21, 2009, our cash on hand was
$3.7 million compared to $2.6 million and $6.8 million at March 29, 2009 and
June 22, 2008, respectively.
  The
following table summarizes our net increase in cash and cash
equivalents:
  Three
      Periods EndedJune
      21, 2009
                
                
                June
      22, 2008(Dollars
      in thousands)Net
      cash (used in) provided by operating activities
                
                $
                (3,278
                )
                
                $
                1,778Net
      cash used in investing activities
                
                
                (1,245
                )
                
                
                (1,377
                )Net
      cash provided by (used in) financing activities
                
                
                5,592
                
                
                
                (306
                )Net
      increase in cash
                
                
                1,069
                
                
                
                95Cash
      at beginning of fiscal year
                
                
                2,585
                
                
                
                6,716Cash
      at end of period
                
                $
                3,654
                
                
                $
                6,811
 
   21
 Table
of Contents
  Our net
cash used in operating activities in the three periods ended June 21, 2009 was
$3.3 million, which was a decrease of $5.1 million compared to a source of $1.8
million in the three periods ended June 22, 2008. The decrease was primarily due
to the decline in our operating income and slower collections on amounts due
from our customers.
  During
the three periods ended June 21, 2009, net cash used in investing activities was
$1.2 million, for the purchase of property, equipment and
software.  During the three periods ended June 22, 2008, net cash used
in investing activities was $1.4 million, primarily spent on the purchase of
property, equipment and software .
  For the
three periods ended June 21, 2009, the net cash provided in financing activities
was $5.6 million versus a use of $0.3 million for the three periods ended June
22, 2008.  The cash provided in the three periods ended June 21, 2009
was mainly related to the borrowing during the first quarter of fiscal year 2010
of $6.0 million on our new revolving facility.  The cash used during
the three periods ended June 22, 2008 was principally due to the quarterly
payment on our term loan facility.
  Senior
Notes and Credit Agreement
  We intend
to fund ongoing operations through cash generated by operations and borrowings
under our revolving credit facility.  On November 30, 2005, the
Company refinanced its capital structure. The objective of the refinancing was
to provide the Company with a long-term capital structure that was consistent
with its strategy and to preserve acquisition flexibility. The refinancing was
completed through an offering of $175.0 million of Senior Notes and a senior
secured credit facility.
 
 The
Senior Notes will mature in December 2013.  Interest is payable
semi-annually.  The notes will be redeemable in the circumstances and
at the redemption prices described in the Senior Notes indenture.  The
indenture governing the notes also contains numerous covenants including, among
other things, restrictions on our ability to: incur or guarantee additional
indebtedness or issue disqualified or preferred stock; pay dividends or make
other equity distributions; repurchase or redeem capital stock; make investments
or other restricted payments; sell assets or consolidate or merge with or into
other companies; incur liens; enter into sale/leaseback transactions; create
limitations on the ability of our restricted subsidiaries to make dividends or
distributions to us; and engage in transactions with affiliates.
 
 New senior credit facility.On July 20, 2007, we entered into a senior secured term loan facility
(the “new term loan facility”) for an aggregate principal amount of $76.6
million and a senior secured revolving loan facility (the “new revolving loan
facility”) for an amount up to $35.0 million (the new term loan facility
together with the new revolving loan facility, the “new credit facility”). The
proceeds of the new loan were used to repay all amounts outstanding under the
existing credit facility (dated as of November 30, 2005) and fund acquisitions
completed during the Company’s second quarter of fiscal year 2008.  In
connection with the new credit facility, the Company recorded $0.5 million of
deferred charges during the second quarter of fiscal year 2008 for transaction
fees and other related debt issuance costs.  Additionally,
approximately $3.7 million of debt issuance costs associated with the
extinguishment of the existing term loan facility were written off and charged
to interest expense during the Company’s second quarter of fiscal year
2008.
 
 On June
10, 2008 we entered into an amendment of the new revolving loan
facility.  The amendment adjusted the interest coverage ratios over
the term of the new revolving loan facility.
 
 On
December 4, 2008, we amended the new revolving loan facility dated July 20,
2007.  The amendment reduced the amount payable to employees and other
individuals in connection with the repurchase of equity interests held by such
individuals or upon the termination of employment of an individual in connection
with the repurchase of stock appreciation rights or other similar interests,
adjusted the interest coverage ratio and the senior secured leverage ratio and
eliminated our ability to carry forward any unused permitted investments in
respect of unrestricted subsidiaries.
 
  22
 Table
of Contents
  On May 4,
2009, we amended the new revolving loan facility dated July 20, 2007. The
amendment restated the applicable percentage as defined in the revolving credit
agreement, increased the commitment fee from 0.50% to 0.75%, decreased the
revolving credit commitment from $35.0 million to $15.0 million, decreased the
permitted annual capital expenditures from $10.0 million to $6.0 million, and
adjusted the interest coverage ratio and the senior secured coverage ratio on
the revolving facility. In connection with the amendment, we wrote off $0.2
million for debt issuance costs associated with the prior revolving facility
dated July 20, 2007 and recorded $0.2 million for debt issuance costs associated
with the new amended facility of which $0.1 million was paid as of June 21,
2009.
 
 Our new
term loan facility matures in November 2012.  Additionally, we have
the ability to obtain up to $75.0 million under our incremental term loan
subject to compliance with our affirmative and negative
covenants.  Borrowings are also available under our new revolving loan
facility maturing in November 2010.
  Borrowings
under our new credit facility bear interest, at our option, at either adjusted
LIBOR plus an applicable margin or the alternate base rate plus an applicable
margin.  The applicable margin with respect to borrowings under our
new revolving loan facility is subject to adjustments based upon a
leverage-based pricing grid.  Our senior secured revolving credit
facility requires us to meet maximum leverage ratios and minimum interest
coverage ratios and includes a maximum annual capital expenditures
limitation.  In addition, the new senior secured revolving credit
facility contains certain restrictive covenants which, among other things, limit
our ability to incur additional indebtedness, pay dividends, incur liens, prepay
subordinated debt, make loans and investments, merge or consolidate, sell
assets, change our business, amend the terms of our subordinated debt and engage
in certain other activities customarily restricted in such
agreements.  It also contains certain customary events of defaults,
subject to grace periods, as appropriate.  As of June 21, 2009, the
Company was in compliance with all debt covenant requirements. In addition to
providing fixed principal payment schedules for the new credit facility, the
loan agreement also includes an Excess Cash Flow Repayment provision that
requires repayment of principal based on the Company’s leverage ratio, EBITDA,
working capital, debt service and tax payments. The Excess Cash Flow amount is
calculated and paid annually with the repayment of principal allocated on a pro
rata basis to the term and revolving loans. Based on the Company’s financial
results for the fiscal year ended March 29, 2009, the Company determined that a
payment of approximately $1.6 million during fiscal year 2010 under the Excess
Cash Flow Repayment Provision of the new credit facility was required. This
payment was made on June 29, 2009 and accordingly, was included in our current
maturities of long-term debt as of June 21, 2009, and March 29, 2009. The
Company is also required to pay an annual non-utilization fee equal to 0.75% of
the unused portion of the revolving credit facility.
  Our
ability to make scheduled payments of principal, or to pay the interest or
additional interest, if any, on, or to refinance our indebtedness, or to fund
planned capital expenditures will depend on our future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control.  Based upon the current level of operations, we believe that
cash flow from operations and available cash, together with borrowings available
under our new credit facility, will be adequate to meet our future liquidity
needs through June 20, 2010.  Our assumptions with respect to future
costs may not be correct, and funds available to us from the sources discussed
above may not be sufficient to enable us to service our indebtedness, including
the Senior Notes, or cover any shortfall in funding for any unanticipated
expenses.  In addition, to the extent we make future acquisitions, we
may require new sources of funding including additional debt, equity financing
or some combination thereof.  We may not be able to secure additional
sources of funding on favorable terms.
  Critical
Accounting Policies and Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reflected in the condensed consolidated
financial statements and accompanying notes.  We base our estimates on
historical experience, where applicable and other assumptions that we believe
are reasonable under the circumstances. Actual results may differ from those
estimates under different assumptions or conditions.
  23
 Table
of Contents
  
 Principles
of Consolidation and Fiscal Year End
  We and
our consolidated entities report on a 52-53 week accounting year.  The
condensed consolidated financial statements included elsewhere in this report
include our financial statements and our wholly-owned subsidiaries for the three
periods ended June 21, 2009 and June 22, 2008, and the fiscal year ended March
29, 2009.  All significant intercompany balances and transactions have
been eliminated in consolidation.
  Revenue
Recognition and Unearned Revenue
  Our
principal revenue earning activity of the Company is related to the sale of
online and print advertising.  Revenue recognition for print and
online products are consistently applied within Company-managed (Direct) and
ID-managed distribution territories as described below.  These revenue
arrangements are typically sold as a bundled product to customers and include a
print ad in a publication as well as online advertisement.  The
Company bills the customer a single negotiated price for both
elements.  In accordance with EITF 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables, the Company separates its deliverables into
units of accounting and allocates consideration to each unit based on relative
fair values.  The Company recognizes revenue for each unit of
accounting in accordance with SEC Staff Accounting Bulletin Number 104, Revenue
Recognition.
  Print
  Print
revenues are derived from sale of advertising pages in our
publications.  We sell a bundled product to our customers that
includes a print advertisement as well as a standard online
advertisement.  The customer can also purchase premium placement
advertising pages such as front cover and back cover.  Revenue for
print advertisement sales, including the premium placement advertising pages, is
recognized when the publications are delivered and available for consumer
access.
  Online
  Online
revenues are derived from the sale of advertising on our various
websites.  We sell a bundled product to our customers that includes a
print advertisement in our publications as well as a standard online
advertisement.  The customer is permitted to purchase premium online
advertisements whereby it can include additional data items such as floor plans,
multiple photos and neighborhood information, and also secure premium placement
in search results.  Revenue for online sales, including the premium
online advertisements, is recognized ratably over the period the online
advertisements are maintained on the website.
  Unearned
revenue
  We have
historically billed our customers a few days before shipment. At both interim
and fiscal year end, we reverse the revenue and the pre-billings completed to
properly account for the timing differences and properly recognize revenue in
the proper period. Prepaid orders are recorded in unearned revenue if
pre-billed. Prepaid subscriptions are recorded as unearned revenue when received
and recognized as revenue over the term of the subscription.
 
 Trade
      Accounts Receivable
 Accounts
receivable consist primarily of amounts due from advertisers in our operated
markets and independent distributors.
 We grant
credit without collateral to many of our customers. Substantially all trade
accounts receivable are comprised of accounts related to advertising displayed
in our various real estate publications. Management believes credit risk with
respect to those receivables is limited due to the large number of customers and
their dispersion across geographic areas, as well as the distribution of those
receivables among our various publication products.
 We use
the allowance method of reserving for accounts receivable estimated to be
uncollectible. The allowance is calculated by applying a risk factor to each
aging category.
  24
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 Customer
      Deposits
 We
receive cash deposits from customers for certain publications prior to printing
and upload of online advertising.  These deposits are recorded as a
liability and reflected accordingly in the condensed consolidated financial
statements.
 
 Goodwill
 As
disclosed in our annual report on Form 10-K filed with the SEC on June 19, 2009,
we had a triggering event under SFAS No. 142 in the third quarter of fiscal year
2009.  As a result, we performed an impairment test of our goodwill
and indefinite-lived intangible assets under SFAS 142 and recorded during the
third and fourth quarters of fiscal year 2009 a total impairment loss of $119.5
million. For further details, refer to our recent annual report on Form 10-K for
fiscal year 2009 filed with the SEC.
 
 We did
not recognize any impairment loss during the three periods ended June 21, 2009
and June 22, 2008.
 
 Impairment
      of Long Lived Assets
 We assess
the recoverability of long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets, whenever adverse events or changes in
circumstances indicate that impairment may have occurred. If the future,
undiscounted cash flows expected to result from the use of the related assets
are less than the carrying value of such assets, an impairment has been incurred
and a loss is recognized to reduce the carrying value of the long-lived assets
to fair value, which is determined by discounting estimated future cash
flows.  The Company did not recognize any impairment loss in any of
the periods presented in this report.
 Intangible
      Assets
 Intangible
assets consist of the values assigned to a consumer database, independent
distributor agreements, advertising lists, subscriber lists, trade names,
trademarks, and other intangible assets. Amortization of intangible assets is
provided utilizing the straight-line method over the estimated useful
lives.
 Recent
Accounting Pronouncements
  In May
2009, The Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 165, Subsequent Events (“SFAS
165”). This Statement establishes general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  It requires
the disclosure of the date through which an entity has evaluated subsequent
events and whether that evaluation date is the date of issuance or the date the
financial statements were available to be issued. This Statement is effective
for interim and annual periods ending after June 15, 2009 and as such, we
adopted this standard in the first quarter of fiscal year 2010 and the adoption
had no impact on our financial position, results of operations or cash
flows.
 
 In April
2009, the FASB issued FASB staff position (“FSP”) FAS 107-1, “Disclosures about Fair Value of
Financial Instruments”(“FSP 107-1”). The staff position increases the
frequency of the disclosures related to the fair value of financial instruments
required by public entities to a quarterly basis rather than just annually. The
quarterly disclosures are intended to provide financial statement users with
more timely information about the effects of current market conditions on an
entity’s financial instruments that are not otherwise reported at fair value.
FSP 107-1 is effective for interim and annual periods ending after June 15,
2009, with early adoption permitted in certain circumstances for periods ending
after March 15, 2009. We adopted this FSP in the first quarter of fiscal year
2010 and the adoption had no impact on our financial position, results of
operations, or cash flows.
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  In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP FAS 142-3 amends the factors an
entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under SFAS 142,
“Goodwill and Other Intangible
Assets”. This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets in business
combinations and asset acquisitions. FSP FAS 142-3 is effective for financial
statements issued for fiscal years and interim periods beginning after December
15, 2008.  Early adoption is prohibited.  We adopted FSP FAS
142-3 in the first quarter of fiscal year 2010 and the adoption did not have any
material impact on our financial position, results of operations, or
cashflows.
 
 In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”), which amends the
disclosure requirements of SFAS 133. SFAS 161 provides an enhanced understanding
about how and why derivative instruments are used, how they are accounted for
and their effect on an entity’s financial position, performance and cash flows.
SFAS 161, which is effective for the first interim period beginning after
November 15, 2008, will require additional disclosure in future
filings.  We adopted this standard in the fourth quarter of fiscal
year 2009 and the adoption did not have any material impact on our financial
position, results of operations, or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an Amendment of ARB No. 51(“SFAS 160”). SFAS 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
160 is effective for fiscal years beginning on or after December 15, 2008
and as such, we adopted this standard in the first quarter of fiscal year 2010
and the adoption did not have any material impact on our financial position,
results of operations, or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations(“SFAS 141R”). SFAS 141R will significantly change the
accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs,
IPR&D and restructuring costs. In addition, under SFAS 141R, changes in
deferred tax asset valuation allowances and acquired income tax uncertainties in
a business combination after the measurement period will impact income taxes.
SFAS 141R is effective for fiscal years beginning after December 15,
2008 and, as such, we adopted this standard in the first quarter of fiscal year
2010.  The provisions are effective for us for business combinations
on or after March 30, 2009.
 
 Effective
March 26, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement 109(“FIN 48”). FIN 48 requires
that a position taken or expected to be taken in a tax return be recognized in
the financial statements when it is more likely than not (i.e. a likelihood of
more than fifty percent) that the position would be sustained upon examination
by tax authorities. A recognized tax position is then measured at the largest
amount of benefit that is greater than fifty percent likely of being realized
upon ultimate settlements. Upon adoption, we did not have any material uncertain
tax positions to account for as an adjustment to our opening balance of retained
earnings on March 26, 2007. In addition, as of June 21, 2009 and March 29,
2009, we did not have any material unrecognized tax benefits.
 
 In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an Amendment of FASB Statement
No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. This
provides entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
being required to apply complex hedge accounting provisions. The provisions of
SFAS 159 are effective as of the beginning of fiscal years that start after
November 15, 2007,. We have adopted SFAS 159 on March 31, 2008 and the
adoption did not have any impact on our financial position, results of
operations, or cash flows.
 
  26
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  In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements.  SFAS 157 emphasizes that
fair value is a market-based measurement, not an entity-specific measurement,
and states that a fair value measurement should be determined based on the
assumptions that market participants would use in pricing the asset or
liability.  SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements.
 
 SFAS 157,
among other things, requires companies to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value, and
specifies a hierarchy of valuation techniques based on whether the inputs to
those valuation techniques are observable or unobservable. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs
reflect the company’s market assumptions. The effective date is for fiscal years
beginning after November 15, 2007.
  SFAS 157
establishes a three-tiered hierarchy to prioritize inputs used to measure fair
value. Those tiers are defined as follows:
  -
              Level
      1 inputs are quoted prices (unadjusted) in active markets for identical
      assets or liabilities that the reporting entity has the ability to access
      at the measurement date.
  -
              Level
      2 inputs are inputs, other than quoted prices included within Level 1,
      that are observable for the asset or liability, either directly or
      indirectly. If the asset or liability has a specified (contractual) term,
      a Level 2 input must be observable for substantially the full term of the
      asset or liability.
  -
              Level
      3 inputs are unobservable inputs for the asset or
    liability.
 
 The
highest priority in measuring assets and liabilities at fair value is placed on
the use of Level 1 inputs, while the lowest priority is placed on the use of
Level 3 inputs.
 
  This
statement also expands the related disclosure requirements in an effort to
provide greater transparency around fair value measures.
 
 As of
March 31, 2008, we adopted SFAS 157 and the adoption did not have a material
impact on our financial position, results of operations or cash
flows.
 
 In
February 2008, the FASB issued FSP FAS 157-2, which delays the effective date of
SFAS 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years, for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).  We
adopted FSP FAS 157-2 in the first quarter of fiscal year 2010 and the adoption
did not have any material impact on our financial position, results of
operations or cash flows.
 
 Off-Balance
Sheet Arrangements
  At June
21, 2009, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
  Contractual
Obligations
  For a
discussion of our contractual obligations, see the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources – Contractual Obligations” section in our annual report on
Form 10-K for the fiscal year ended March 29, 2009.  There have been
no material developments with respect to contractual obligations since March 29,
2009.
  Item3.  Quantitative and Qualitative Disclosures About
Market Risk
  For a
discussion of certain of the market risks to which we are exposed, see the
“Quantitative and
Qualitative Disclosures About Market Risk”section in our annual report
on Form 10-K for the fiscal year ended March 29, 2009.
  27
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 Item 4.   Controls and Procedures
  Evaluation
of Disclosure Controls and Procedures
  As of the
end of the first quarter ended June 21 2009, our management performed an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
“disclosure controls and procedures” (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934 (the
Exchange Act)). Disclosure controls and procedures are controls and other
procedures designed to ensure that information required to be disclosed in our
reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms and include, without
limitation, controls and procedures designed to ensure that information we are
required to disclose in such reports is accumulated and communicated to
management including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.  Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end of the period
covered by this report, and due to the material weaknesses in internal control
over financial reporting discussed below, our disclosure controls and procedures
were not effective as of June 21, 2009.
  Our
management assessed the effectiveness of our internal control over financial
reporting, as defined in Securities Exchange Commission Act Rule 13a-15(f)
as of June 21, 2009 and this assessment identified the following material
weaknesses in our internal control over financial reporting:
 
 1.
              
              Deficiencies
      in our IT environment due to untimely removal of network access for
      terminated employees.2.
              
              Deficiencies
      in maintaining adequate controls over certain key spreadsheets used in our
      financial reporting process including review of these
      spreadsheets.
 Since the
discovery of the material weaknesses in internal controls described above,
management is strengthening the Company’s internal controls over financial
reporting and is taking various actions to improve our internal controls
including, but not limited to the following:
 
 1.
              
              Remediation
      efforts were made to ensure notification of IT upon the departure of
      employees for purposes of terminating their network access. The Company is
      currently reviewing the access eligibility of the current users of its
      network. Testing of these remediation efforts is
  pending.2.
              
              Remediation
      efforts were made to ensure adequate controls over key spreadsheets by
      implementing review and password protection on the spreadsheets and
      formulas and maintaining historic data in a read only access as well as a
      formal review process. Testing of these remediation efforts is
      pending.
 
 Changes
in Internal Control Over Financial Reporting
 
 Other
than the items noted above, there was no change in our internal control over
financial reporting that occurred during our fiscal quarter ended June 21, 2009
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
 
   28
 Table
of Contents
 NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 PART II –OTHER INFORMATION
  Item 1.
              Legal
      Proceedings
  From time to time, we are involved in legal proceedings arising in the
ordinary course of our business. We are not currently a party to any litigation
that management believes, if determined adversely to us, would have a material
adverse effect on our results of operations, financial condition or cash
flows.
 
 Item 1A.
              Risk
      Factors
 
 For a
discussion of risk factors, see “Item 1A. – Risk
Factors” section in our annual report on Form 10-K for the fiscal year
ended March 29, 2009.  There have been no material changes from the
risk factors previously disclosed in the Form 10-K filed on June 19,
2009.
 
 Item 2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds
 
 None.
 Item 3.
              Defaults
      upon Senior Securities
 
 None.
 Item 4.
              Submission
      of Matters to a Vote of Security
Holders
 
 None.
 Item 5.
              Other
      Information
 
 There
were no disclosures of any information required to be filed on Form 8-K during
the first quarter of fiscal year 2010 that were not filed.
 
 Item 6.
              Exhibits
 
 See the
separate Exhibits index attached hereto and hereby incorporated
herein.
 
 
  29
 Table
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   SIGNATURES
   Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
  Network
      Communications, Inc.Date:  August
      4, 2009
                    
                    By:
                    /s/  Daniel R. McCarthy
                      Chairman
      and Chief Executive Officer
                      (Principal
      Executive Officer)Date:
      August 4, 2009
                    
                    By:
                    /s/  Gerard P.
      Parker
                      Senior
      Vice President and Chief Financial Officer
                      (Principal
      Financial and Accounting Officer)
 
  
  30
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 NETWORK
COMMUNICATIONS, INC. AND SUBSIDIARIES
 PART II –OTHER INFORMATION
  Exhibit Index
 (Exhibits Physically Filed
Herewith)
 
 
 Number
              
              Title31
              .1
              
              Certification
      of the Chairman and Chief Executive Officer pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002.31
              .2
              
              Certification
      of the Senior Vice President and Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32
              .1*
              
              Certification
      of Chairman and Chief Executive Officer pursuant to Title 18 of the United
      States Code Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32
              .2*
              
              Certification
      of Senior Vice President and Chief Financial Officer pursuant to Title 18
      of the United States Code Section 1350, as adopted pursuant to Section 906
      of the Sarbanes-Oxley Act of 2002.
 
 *
              This
      exhibit is hereby furnished to the SEC as an accompanying document and is
      not to be deemed “filed” for purposes of Section 18 of the Securities
      Exchange Act of 1934 or otherwise subject to the liabilities of that
      Section, nor shall it be deemed incorporated by reference into any filing
      under the Securities Act of 1933 or the Securities Exchange Act of
      1934.
 
 
  31