UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2004
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-18299
NEWS COMMUNICATIONS, INC.
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(Name of Small Business Issuer in Its Charter)
Nevada 13-3346991
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2 Park Avenue, Suite 1405
New York, New York 10016
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 689-2500
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 X No
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The number of shares of common stock outstanding as of May 10, 2004 was
11,649,458.
Transitional Small Business Disclosure Format (check one) Yes No X
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NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet at March 31, 2004...................3
Unaudited Consolidated Statements of Operations
for the three months ended March 31, 2004 and 2003.......................4
Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003.....................................5
Notes to Unaudited Consolidated Financial Statements.....................6
Item 2. Management's Discussion and Analysis or Plan of Operation................8
Item 3. Controls and Procedures.................................................11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................12
Signatures........................................................................13
Certifications
31.1 Chief Executive Officer's Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer's Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Chief Financial Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
2
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements
News Communications, Inc. and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
March 31, 2004
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Assets
Current:
Cash and cash equivalents $332,331
Accounts receivable - net of allowance for doubtful accounts of $299,231 757,996
Notes receivable 185,000
Other 234,890
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Total current assets 1,510,217
Restricted cash 34,102
Notes receivable, net of current portion 90,000
Property and equipment at cost- net 335,001
Goodwill 314,809
Trade names, net 482,159
Other - net 25,842
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Total assets $ 2,792,130
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Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 703,983
Accrued expenses 1,111,591
Note payable, current portion 9,894
Unearned revenue 143,297
Due to related parties 727,442
Capital lease, current portion 19,592
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Total current liabilities 2,715,799
Due to related parties 249,161
Note payable, net of current portion 29,277
Capital lease, net of current portion 22,548
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Total liabilities 3,016,785
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Commitments -
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Stockholders' deficit:
Preferred stock, $1.00 par value; 500,000 shares authorized: 182,529 shares
issued and outstanding: $1,914,000 aggregate liquidation value 182,529
Common stock, $.01 par value; authorized 100,000,000 shares; 12,287,025
shares issued and 11,628,691 outstanding 122,870
Paid-in-capital preferred stock 1,613,320
Paid-in-capital common stock 27,036,279
Deficit (28,277,924)
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677,074
Less: Treasury stock, (658,334 common shares) - at cost (901,729)
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Total stockholders' deficit (224,655)
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Total liabilities and deficit $ 2,792,130
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See accompanying notes to unaudited financial statements.
3
News Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31 2004 2003
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Net revenues $1,883,410 $1,571,062
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Expenses:
Editorial 475,627 326,984
Production and distribution 548,600 396,453
Selling 589,034 500,677
General and administrative 912,384 839,478
Depreciation and amortization 46,441 46,125
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Total expenses 2,572,086 2,109,717
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Loss before interest and provision for income taxes (688,676) (538,655)
Interest income (expense), net (15,992) (7,352)
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Loss before provision for income taxes (704,668) (546,007)
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Provision for income taxes - 2,000
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Net loss $(704,668) $ (548,007)
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Loss per common share:
Basic and diluted $ (0.06) $ (0.05)
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Weighted average number of common shares outstanding:
Basic and diluted 11,628,691 10,201,654
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See accompanying notes to unaudited financial statements.
4
News Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months ended March 31, 2004 2003
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Cash flows from operating activities:
Net loss $ (704,668) $ (548,007)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 46,441 46,125
Provision for doubtful accounts 16,000 (34,300)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 179,166 (133,630)
Other current assets (34,059) (36,834)
Other assets (9,696) 1,256
Increase (decrease) in:
Accounts payable and accrued expenses (283,745) 272,365
Other liabilities (18,750) 75,000
Related party payable (654,938) 19,480
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Net cash used in operating activities (1,464,249) (338,545)
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Cash flows from investing activities:
Capital expenditures (21,313) (13,630)
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Net cash used in investing activities (21,313) (13,630)
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Cash flows from financing activities:
Proceeds from issuance of common stock - 100,000
Dividends on preferred stock (282) (282)
Payment of capital lease obligations (7,246) (4,025)
Payments on automobile loan (2,474) (1,111)
Collection of notes receivable 661,000 11,049
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Net cash provided by financing activities 650,998 105,631
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Net increase (decrease) in cash (834,564) (246,544)
Cash, beginning of quarter 1,166,895 552,476
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Cash, end of quarter $ 332,331 $ 305,932
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Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 76,018 $ 2,003
Income taxes 8,462 12,155
Non-cash activities:
Purchases of equipment under capital leases - 24,886
Conversion of preferred stock into common stock - 30
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See accompanying notes to unaudited financial statements.
5
NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation:
In the opinion of News Communications, Inc.'s ("NCI" or "the Company")
management, the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information set forth therein. These consolidated financial
statements are condensed and, therefore, do not include all of the information
and footnotes required by generally accepted accounting principles in the United
States of America for complete financial statements. The results for the interim
periods are not necessarily indicative of the results for a full year. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
The Company is growing the operations of its core publications, Dan's Papers,
Dan's Hampton Style (also called Dan's Magazine Hampton Style), Montauk Pioneer
and The Hill. The Company intends to continue to finance these new business
initiatives and its existing liabilities from working capital, from additional
sales of equity securities, from the installment payments due to the Company
from the sale of subsidiaries or by a sale of assets. A total of $1,400,000 was
received in 2003 from the sale of the Company's common stock. The Company
believes that additional investments to fund the Company's obligations may be
received during the course of 2004. Regardless of whether additional funds are
received, the Company believes that it will have sufficient working capital to
fund its operations and obligations through December 31, 2004, due to the
seasonality of Dan's Papers and the anticipated traditionally stronger third
quarter results.
These consolidated financial statements should be read in conjunction with NCI's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003 and the
related audited financial statements included therein.
B. Income (Loss) per Share:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which
provides for the calculation of "basic" and "diluted" earnings per share. Basic
earnings per share include no dilution and are computed by dividing income
available to common shareholders by the weighted average number of shares of
common stock outstanding for the period. Diluted earnings per share reflect, in
periods in which they have a dilutive effect, the effect of shares of common
stock issuable upon exercise of common stock equivalents. The assumed conversion
of the options and warrants would have been anti-dilutive and, therefore, were
not considered in the computation of diluted earnings per share for the three
months ended March 31, 2004 and 2003.
For the three months ended March 31, 2004, options to purchase 768,153 shares of
common stock, warrants to purchase 3,315,873 shares of common stock, convertible
preferred shares convertible into 750,694 shares of common stock, and
convertible notes convertible into 249,161 shares of common stock were not
included in the computation of diluted loss per share because the effect would
be anti-dilutive. These options and warrants, which expire from July 27, 2004
through November 28, 2015, were all outstanding at March 31, 2004.
C. Accounting for Stock-Based Compensation:
The Company has several stock-based employee compensation plans in effect that
were entered into in 1987, 1993, and 1999. The Company accounts for all
transactions under which employees receive shares of stock or other equity
instruments in the Company based on the price of its stock
6
in accordance with the provisions of Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees." No stock-based employee compensation
cost is reflected in net loss, as all options granted under the plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant. There were no options granted and no options were vested during
the quarters ended March 31, 2004 and 2003.
7
NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in this Item 2, Management's Discussion and Analysis
or Plan of Operation, contains "forward looking statements" within the meaning
of Section 27A of the Securities Act 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results may materially
differ from those projected in the forward-looking statements as a result of
certain risks and uncertainties set forth in this report. Although management
believes that the assumptions made and expectations reflected in the forward
looking statements are reasonable, there is no assurance that the underlying
assumptions will, in fact, prove to be correct or that actual future results
will not be different from the expectations expressed in this report.
News Communications, Inc. is an established publisher of various
advertiser-supported newspapers and magazines. As of March 31, 2004, we
published 3 newspapers (The Hill, Dan's Papers, and Montauk Pioneer) and
expanded our publications with a new magazine in the Hamptons in New York, Dan's
Hampton Style (also called Dan's Magazine Hampton Style). The publication
schedule for Dan's Hampton Style will be expanded to approximately weekly during
the summer after the season's introductory issue in May 2004 and approximately
monthly thereafter.
Dan's Papers is planning to introduce Hampton Sports in June 2004, an expansion
of the Dan's Magazines brand. The Hamptons have long been known as the
"playground of the rich and famous." From spring until fall, on a monthly basis,
Hampton Sports will chronicle the activities that have contributed to the
Hamptons' reputation as the place to vacation and play.
The following discussion and analysis of the financial condition and operating
results are based upon the consolidated financial statements of the Company,
which have been prepared in accordance with generally accepted accounting
principles ("GAAP") in the United States of America.
Throughout this Management Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"), management discusses financial measures in
accordance with GAAP and also on a non-GAAP basis. The Company's definition of
EBITDA is earnings before interest, income taxes, depreciation and amortization.
EBITDA does not include gains or losses from the sale of subsidiaries. All
references in this MD&A to EBITDA are to a non-GAAP financial measure. EBITDA, a
measure widely used among media related businesses, is used in this report
because management believes that it is an effective way of monitoring the
operating performance of our company relative to the industry. Additionally, the
Company believes that the use of non-GAAP financial measures enables it and
investors to evaluate, and compare from period to period, the results from
ongoing operations in a more meaningful and consistent manner. A reconciliation
of GAAP to non-GAAP financial measures is included on page 9.
8
Results of Operations:
Three Months Ended March 31, 2004 Compared With Three Months Ended March 31,
2003
Revenues
Revenues increased $312,348 or 20% in the first quarter of 2004 to $1,883,410
from $1,571,062 for the first quarter of 2003 primarily due to an increase in
advertising pages sold. Variances in specific revenue categories for the three
month period were as follows: display advertising, which represented 74% of
total revenues, increased 21% to $1,397,502 in the first quarter of 2004
compared with $1,158,565 in the first quarter of 2003. Classified advertising,
which represented 20% of revenues, increased 22% to $375,946 from $307,181 in
the first quarter of 2003. Subscription revenues declined $59,167 to $42,917
in 2004. Other revenues increased $63,813 to $67,045 in the first quarter of
2004, largely due to management fees of $62,500 from Marquis Who's Who LLC.
Among our individual operating units, display advertising was strong at Dan's
Papers Inc. increasing 33% and classified advertising increased 16%. Display
revenues for The Hill increased 16%, due in part to the introduction of a third
regular weekly issue in February 2004. Classified advertising increased 78%.
Operating Expenses
Operating expenses for the first quarter of 2004 were $2,572,086, an increase of
22%, compared with operating expenses of $2,109,717 during the first quarter of
2003. This is largely attributed to the investment in operating costs associated
with the expansion of The Hill and Dan's Hampton Style. The Hill was published
weekly in January and February 2003 and a second issue was added in March 2003.
Beginning in February 2004, The Hill added a third weekly issue. Further
operating costs were incurred in the first quarter of 2004 on the expanded
publication schedule for Dan's Hampton Style and for the planned introduction of
Dan's Hampton Sports.
Variances in specific expense categories: editorial, production, and
distribution were 42% higher compared to the three months ended March 31, 2003,
due in part to the costs associated with Dan's Hampton Style, which was first
introduced in the second quarter of 2003, and Dan's Hampton Sports, and with the
introduction in February 2004 of a third regular weekly issue of The Hill.
Selling expenses were 18% higher for the three months ended March 31, 2004
compared to the same quarter in 2003 due in part to the addition of sales staff
for Dan's Hampton Style and Dan's Hampton Sports and to higher sales commissions
on the revenue gains at Dan's Papers and The Hill. General and administrative
expenses increased 9% for the three months ended March 31, 2004 compared to the
three months ended March 31, 2003 due in part to a $30,000 reduction of bad debt
expense in 2004 compared with a reduction of $65,000 in 2003, and to higher
employer taxes.
9
Provision for Income Taxes
There was no provision (benefit) for state and local income taxes for the three
months ended March 31, 2004 compared with $2,000 for the same period in 2003.
Income
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
three months ended March 31, 2004, declined by $149,705 from a loss of $492,530
in the first quarter of 2003 to a loss of $642,235 in the first quarter of 2004.
Revenue gains at Dan's Papers were impacted by higher editorial, production,
distribution, sales commission, and bad debt costs. Revenue gains at The Hill
were largely offset by the increase in the editorial, production, distribution,
and selling expenses associated with the introduction of a third issue of
The Hill in February 2004. General and administrative costs were higher for the
three months ended March 31, 2003 due primarily to a $30,000 reduction of bad
debt expense in 2004 compared with a reduction of $65,000 in 2003, and to
higher employer taxes.
Reconciliations of GAAP to Non-GAAP Financial Measures. Reconciliations of GAAP
to non-GAAP financial measures are provided below. As previously explained,
EBITDA is a measure widely used among media related businesses and is used in
this report because management believes that it is an effective way of
monitoring the operating performance of our company relative to the industry.
EBITDA does not include capital gains or losses from the sale of subsidiaries.
Three Months Ended March 31 2004 2003
--------------------------------------------------------------------------------
Earnings before interest, taxes, depreciation and
amortization (EBITDA)
Loss from operations $(688,676) $(538,655)
Depreciation and amortization 46,441 46,125
--------------------------------------------------------------------------------
EBITDA $(642,235) $(492,530)
--------------------------------------------------------------------------------
The Company generated a net loss of $704,668 in the first quarter of 2004
compared with a net loss of $548,007 for the first quarter of 2003. Revenues
increased $312,348 and were offset by an increase in editorial, production, and
distribution costs of $300,790 and an increase in selling expenses of $88,357.
General and administrative expenses increased $72,906. Depreciation and
amortization expense was essentially flat, net interest expense increased
$8,640, and there was no tax provision for the first quarter of 2004 compared
with a tax provision of $2,000 for the quarter ended March 31, 2003.
On a per share basis, the net loss was $0.06 for the first quarter of 2004
compared with net loss per share of $0.05 for the first quarter of 2003.
Liquidity and Capital Resources
Cash as of March 31, 2004 was $332,331, excluding restricted cash of $34,102,
compared with $305,932, excluding restricted cash of $34,102, for the same
period in 2003. For the three months ended March 31, 2004, total cash used in
operating activities was $1,464,249, compared to cash used in operating
activities of $338,545 for the same period in 2003. This was primarily
attributable to the net loss of $704,668 in 2004, a decrease in accounts
payable, accrued expenses and other liabilities of approximately $302,000, a
decrease in related party payable of approximately $655,000, and an increase in
other assets of approximately $44,000. This was partially offset by a decrease
in accounts receivable of approximately $179,000, approximately $46,000 in
depreciation and amortization expense and the bad debt provision of
approximately 16,000.
10
Capital expenditures were $21,313. Cash provided by financing activities totaled
$650,998 and was primarily attributed to $661,000 in cash collected on notes
receivable. Payments related to capital lease obligations were $7,246, payments
on automobile loans were $2,474, and dividends on preferred stock totaling $282
were accrued.
As of March 31, 2004, the Company had current assets of $1,510,217, including
cash of $332,331. At March 31, 2004, the Company had an excess of current
liabilities over current assets in the amount of $1,205,582. This deficit
reflects the seasonality of Dan's Papers, Dan's Hampton Style, Montauk Pioneer,
and Dan's Hampton Sports (new in summer of 2004) which are resort area
publications. The third fiscal quarter is the most significant in terms of
revenues and operating income and is expected to fully fund the deficit.
Included in the current liabilities is a $600,000 payment due to the former
minority shareholder of Dan's Papers, which amount can be paid in 2005 without
violating the terms of the Company's agreement with the minority shareholder,
and a $112,461 payment due in 2004 to the former publisher of The Hill for
accrued vacation and bonus and to cash-out a phantom equity interest in Capital
Hill.
At March 31, 2004, there were no material changes in the ordinary course of
business to the contractual obligations of the Company. The Company is not party
to any off-balance sheet arrangements.
Historically, in addition to cash from operations, the Company has relied on
financing in the form of sales of equity securities, sales of convertible notes,
and a $1,000,000 Revolving Credit Facility, extended by a shareholder which has
since been terminated, to meet its working capital requirements. The Company
also generated cash from sale of subsidiaries.
The Company is continuing to grow the operations of its core publications, Dan's
Papers, Dan's Hampton Style and The Hill. These investments in operating costs
during the first quarter of 2004 were self-funded, in part, by the growth in
advertising revenues. Dan's Hampton Style was originally introduced in 2003 to
compliment Dan's Papers, its weekly newspaper. The Company is further developing
plans to expand publication of Dan's Hampton Style and to introduce Dan's
Hampton Sports in 2004. In March 2003, the Company expanded publication of The
Hill to twice a week on Tuesdays, and a third issue was published in certain
weeks of the fourth quarter. In February of 2004, the Company continued weekly
publication of the third issue of The Hill.
The Company intends to continue to finance these business initiatives and its
existing liabilities from working capital, from additional sales of equity
securities, from the installment payments due to the Company from the sale of
subsidiaries or by a sale of assets. A total of $1,400,000 was received in 2003
from the sale of the Company's common stock and a total of $661,000 was received
in the first quarter of 2004 from payments due the Company from sale of
subsidiaries. The Company believes that it will have sufficient working capital
to fund its operations and obligations through December 31, 2004, due to the
seasonality of Dan's Papers and the anticipated traditionally stronger third
quarter results.
ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2004, the Company's management carried out an evaluation, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including the Company's consolidated subsidiaries)
required to be included in periodic reports filed under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
In designing and evaluating the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act), management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurances of achieving the desired
control objectives, as ours are designed to do, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. We believe that our disclosure controls and
procedures provide such reasonable assurance.
There have not been any significant changes in the Company's internal controls
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended) during our
fiscal first quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
11
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
31.1'D' Chief Executive Officer's Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2'D' Chief Financial Officer's Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1'D' Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2'D' Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
'D' Indicates that exhibit is attached hereto.
Reports on Form 8-K:
None
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 19, 2004 /s/ James A. Finkelstein
------------------------
James A. Finkelstein
President and Chief Executive Officer
Date: May 19, 2004 /s/ E. Paul Leishman
------------------------
E. Paul Leishman
Chief Financial Officer
13
STATEMENT OF DIFFERENCES
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The dagger symbol shall be expressed as................................ 'D'