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 September 30, 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.
------------------------
(Name of Small Business Issuer in Its Charter)
Nevada 13-3346991
------------------------------ -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2 Park Avenue, Suite 1405
New York, New York 10016
------------------------- ---------
(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
----- -----
The number of shares of common stock outstanding as of November 15, 2004 was
11,649,458.
Transitional Small Business Disclosure Format (check one) Yes No X
---- ------
NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet at September 30, 2004................................3
Unaudited Consolidated Statements of Operations
for the three months and nine months ended September 30, 2004 and 2003....................4
Unaudited Consolidated Statements of Cash Flows
for the nine months ended September 30, 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.................................................................13
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................................13
Signatures......................................................................................14
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 as of September 30, 2004
(Unaudited)
-------------------------------------------------------------------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 230,667
Accounts receivable - net of allowance for doubtful accounts of $446,503 2,281,865
Notes receivable 10,000
Other 238,262
-------------------------------------------------------------------------------------------------------------
Total current assets 2,760,794
Restricted cash 34,102
Notes receivable, net of current portion 80,000
Property and equipment at cost- net 283,025
Goodwill 314,809
Trade names, net 469,127
Other - net 24,298
-------------------------------------------------------------------------------------------------------------
Total assets $ 3,966,155
-------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,153,834
Accrued expenses 1,133,610
Income taxes payable 57,477
Note payable, current portion 9,894
Unearned revenue 124,547
Due to related parties 322,085
Capital lease, current portion 12,883
-------------------------------------------------------------------------------------------------------------
Total current liabilities 2,814,330
Due to related parties 557,183
Note payable, net of current portion 24,330
Capital lease, net of current portion 19,417
-------------------------------------------------------------------------------------------------------------
Total liabilities 3,415,260
-------------------------------------------------------------------------------------------------------------
Commitments
-------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1.00 par value; 500,000 shares authorized: 177,529 shares issued and outstanding:
$1,864,000 aggregate liquidation value 177,529
Common stock, $.01 par value; authorized 100,000,000 shares; 12,307,792 shares
issued and 11,649,458 outstanding 123,078
Paid-in-capital preferred stock 1,568,320
Paid-in-capital common stock 27,086,071
Deficit (27,502,374)
-------------------------------------------------------------------------------------------------------------
1,452,624
Less: Treasury stock (658,334 common shares) - at cost (901,729)
-------------------------------------------------------------------------------------------------------------
Total stockholders' equity 550,895
-------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 3,966,155
-------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited financial statements.
3
News Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------------- --------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------------------------- --------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Net revenues $ 4,480,166 $ 3,514,747 $ 10,458,493 $ 8,311,239
-----------------------------------------------------------------------------------------------------------------------------
Expenses:
Editorial 582,016 534,805 1,568,712 1,419,601
Production and distribution 1,341,907 1,126,176 2,873,395 2,346,164
Selling 1,055,383 823,483 2,569,983 2,131,764
General and administrative 1,057,681 1,109,690 3,104,756 2,907,264
Depreciation and amortization 48,331 50,986 141,632 144,019
-----------------------------------------------------------------------------------------------------------------------------
Total expenses 4,085,318 3,645,140 10,258,478 8,948,812
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations, before gain
on sale of publication and interest
and provision (benefit) for income taxes 394,848 (130,393) 200,015 (637,573)
Gain on sale of publication - 123,316 - 123,316
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations, before interest
and provision (benefit) for
income taxes 394,848 (7,077) 200,015 (514,257)
Interest income (expense), net (13,412) (10,080) (42,612) (27,594)
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit)
for income taxes 381,436 (17,157) 157,403 (541,851)
Provision (benefit) for income taxes 21,182 (2,424) 85,956 32,502
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 360,254 $ (14,733) $ 71,447 $ (574,353)
Preferred stock dividends (282) - (846) -
-----------------------------------------------------------------------------------------------------------------------------
Net income or (loss) available to
common stockholders $ 359,972 $ (14,733) $ 70,601 $ (574,353)
Preferred stock dividends 282 - 846 -
Elimination of interest on convertible debt 4,033 - 12,011 -
-----------------------------------------------------------------------------------------------------------------------------
Net income or (loss) applicable to
common stockholders $ 364,287 $ (14,733) $ 83,458 $ (574,353)
-----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic $ 0.03 $ (0.00) $ 0.01 $ (0.06)
-----------------------------------------------------------------------------------------------------------------------------
Diluted 0.03 (0.00) 0.01 (0.06)
-----------------------------------------------------------------------------------------------------------------------------
Weighted-average number of
common shares outstanding:
Basic 11,649,458 10,589,410 11,640,969 10,383,740
-----------------------------------------------------------------------------------------------------------------------------
Diluted 12,655,109 10,589,410 12,655,185 10,383,740
-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited financial statements.
4
News Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30, 2004 2003
-----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 71,447 $ (574,353)
Adjustments to reconcile net income (loss) to net cash (used in)
operating activities:
Depreciation and amortization 141,632 144,019
Provision for doubtful accounts 222,700 147,100
Gain on sale of publication - (123,316)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,551,403) (1,256,119)
Other current assets (37,587) 3,640
Other assets (8,152) 4,487
Increase (decrease) in:
Accounts payable and accrued expenses 188,283 1,002,665
Income taxes payable 57,477 1,291
Other liabilities (37,500) 56,250
Related party payable 34,097 62,443
-----------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (919,006) (531,893)
-----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (51,498) (47,593)
Collection of notes receivable 846,000 70,200
-----------------------------------------------------------------------------------------------------------
Net cash from investing activities 794,502 22,607
-----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock - 400,000
Payment of related party notes payable (786,370) (112,461)
Dividends on preferred stock (846) (846)
Payment of capital lease obligations (17,087) (17,206)
Payments on automobile loan (7,421) (3,787)
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (811,724) 265,700
-----------------------------------------------------------------------------------------------------------
Net decrease in cash (936,228) (243,586)
Cash, beginning of period 1,166,895 552,476
-----------------------------------------------------------------------------------------------------------
Cash, end of period $ 230,667 $ 308,890
-----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 97,968 $ 11,573
Income taxes 27,024 27,449
Non-cash activities:
Purchases of equipment under capital leases - 34,309
Purchase of automobile - debt incurred - 22,454
Conversion of preferred stock into common stock 50,000 30
--------------------------------------------------------------------------------------------------
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.
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. Earnings (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 stockholders 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
and nine months ended September 30, 2004 and 2003.
Convertible preferred shares convertible into 748,468 and 757,033 weighted
average shares of common stock and convertible notes convertible into
257,183 shares of common stock were considered in the computation of diluted
earnings per share for the three and for the nine months ended September 30,
2004, respectively. Weighted average options to purchase 384,440 and
755,727 shares of common stock for the three and nine months ended
September 30, 2004 and 2003 were excluded from the computation of earnings
per diluted share. In each of these periods the exercise prices of the
options exceeded the average fair market value of the Company's common stock
and the effect would have been anti-dilutive.
For the three and nine months ended September 30, 2003, convertible
preferred shares convertible into 767,381 and 767,568 weighted average
shares of common stock, respectively, were not considered in the computation
of diluted earnings per share because the effect would have been anti-dilutive.
For the three and the nine months ended September 30, 2004 and 2003, warrants
to purchase 3,315,873 shares of common stock were not considered in computation
of diluted earnings per share and were excluded from the computation of earnings
per diluted common share because in each of these periods the exercise prices of
the warrants exceeded the average fair market value of the Company's common
stock and the effect would have been anti-dilutive. Convertible notes
convertible into 241,139 shares of common stock for the three and for the nine
months ended September 30, 2003, were not
6
considered in the computation of diluted earnings per share because the effect
would have been anti-dilutive. The options and warrants, which expire from July
5, 2005 through November 28, 2015, were all outstanding at September 30, 2004
Three Months Ended Nine Months Ended
--------------------------------------------- -----------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
--------------------------------------------- -----------------------------------------
Weighted-average number of shares on
which earnings per share calculations are
based:
Basic 11,649,458 10,589,410 11,640,969 10,383,740
Add - incremental shares associated
with convertible preferred stock 748,468 - 757,033 -
Add - incremental shares associated
with convertible debt 257,183 - 257,183 -
---------------------------------------------------------------------------------------------------------------------------------
Diluted 12,655,109 10,589,410 12,655,185 10,383,740
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to
common stockholders - basic computation $ 359,972 $ (14,733) $ 70,601 $ (574,353)
Elimination of preferred stock
dividend requirements upon assumed
conversion of preferred stock 282 - 846 -
Elimination of interest on
convertible preferred debt 4,033 - 12,011 -
---------------------------------------------------------------------------------------------------------------------------------
Net income on which diluted earnings
per share are calculated $ 364,287 $ (14,733) $ 83,458 $ (574,353)
---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share of common stock
---------------------------------------------------------------------------------------------------------------------------------
Basic $ 0.03 $ (0.00) $ 0.01 $ (0.06)
---------------------------------------------------------------------------------------------------------------------------------
Diluted 0.03 (0.00) 0.01 (0.06)
---------------------------------------------------------------------------------------------------------------------------------
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 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 income / 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 23,331 options granted and vested in the three and
nine months ended September 30, 2004. In accordance with SFAS No. 148, the
following table illustrates the effect on net loss and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123
"Accounting for Stock-Based Compensation".
Three Months Ended Nine Months Ended
-------------------------------------------- -----------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
-------------------------------------------- -----------------------------------------
Net income (loss), as reported $360,254 ($14,733) 71,447 (574,353)
Less: Total stock-based employee
compensation expense determined
under fair value based method
for all awards (10,450) (8,213) (10,450) (8,213)
-----------------------------------------------------------------------------------
Proforma net income (loss) $349,804 ($22,946) $60,997 ($582,566)
--------------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share:
As reported 0.03 (0.00) 0.01 (0.06)
Proforma 0.03 (0.00) 0.01 (0.06)
--------------------------------------------------------------------------------------------------------------------------------
7
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 ("MD&A"), 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 September 30, 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). Dan's Hampton Style
was published on approximately a weekly basis during July and August and will be
published on approximately a monthly basis thereafter.
Dan's Papers Inc. introduced Dan's 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, Dan's
Hampton Sports chronicles 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, 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 the 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.
Results of Operations:
Three Months Ended September 30, 2004 Compared With Three Months Ended September
30, 2003
Revenues
Revenues increased $965,419, or 27%, in the third quarter of 2004 to $4,480,166
from $3,514,747 for the third 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 88% of
total revenues, increased 28% to $3,923,236 in the third quarter of 2004
compared with $3,075,885 in the third quarter of 2003. Classified advertising,
which represented 9% of revenues, increased 33% to $414,108 from $311,072 in the
third quarter of 2003. Other revenue increased $15,032 to $142,822 in the third
quarter of 2004, largely due to management fees of $62,500 from Marquis Who's
Who LLC.
Among the Company's publications, at Dan's Papers classified advertising was
strong and increased 34% and display advertising increased 3%. Display revenues
at Dan's Hampton Style and Dan's Hampton Sports, increased 109% to $895,793 from
$428,235 compared to the third quarter of 2003. This is attributed to the
publication of seven issues of Dan's Hampton Style and two issues of Dan's
Hampton Sports which was introduced in the second quarter of 2004 compared with
the publication of five issues of Dan's Hampton Style in
8
the same period of 2003. Revenues at The Hill increased 46%, with gains in
display advertising that were driven in part by special issues published at the
national political conventions. The increase is also due in part to the
introduction of a third regular weekly issue in February 2004. Classified
advertising at The Hill increased 27%.
Operating Expenses
Operating expenses for the third quarter of 2004 were $4,085,318, an increase of
12%, compared with operating expenses of $3,645,140 during the third quarter of
2003. Excluding expenses of $66,559 from a sold publication (GSN: Government
Security News, which was sold in September 2003) operating expenses increased
17% to $4,085,318 in the third quarter of 2004 compared with $3,494,967 for the
third 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 and
Dan's Hampton Sports. Further operating costs were incurred in the third quarter
of 2004 on the expanded publication schedule for Dan's Hampton Style and on the
introduction of Dan's Hampton Sports. A third regular weekly issue of The Hill
was added to the publication schedule in February 2004. Previously in March
2003, expansion at The Hill began with the publication of a second regular
weekly issue.
Variances in specific expense categories excluding the sold publication were as
follows: editorial, production, and distribution were 20% higher compared to the
three months ended September 30, 2003, due in part to the costs associated with
the increase in the number of issues of Dan's Hampton Style and Dan's Hampton
Sports that were published, and with publication of a third regular weekly issue
of The Hill, which was introduced in February 2004. Selling expenses were 40%
higher for the three months ended September 30, 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, Dan's Hampton Style, Dan's Hampton Sports and The Hill.
General and administrative expenses decreased 2% for the three months ended
September 30, 2004 compared to the three months ended September 30, 2003.
Provision for Income Taxes
The provision for state and local income taxes for the three months ended
September 30, 2004 was $21,182 compared with a benefit of $2,424 for the same
period in 2003.
Income
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
three months ended September 30, 2004, increased $522,586 from a loss of $79,407
in the third quarter of 2003 to a profit of $443,179 in the third quarter of
2004. Revenues increased $965,419 and there were gains in all categories at each
publication. Editorial, production, distribution, and selling costs were higher,
driven by the increase in the publication schedule of Dan's Magazines and to the
addition of a third weekly issue of The Hill. Operating expenses for the sold
publication (GSN which was sold in September 2003) for the third quarter of
2003 were $66,559. General and administrative costs were lower for the three
months ended September 30, 2004.
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 the Company relative to the industry.
EBITDA does not include capital gains or losses from the sale of subsidiaries.
Three months ended September 30, 2004 September 30, 2003
------------------------------------------------------------------------------ ---------------------
Earnings before interest, taxes, depreciation and amortization
(EBITDA)
Income (loss) from operations $394,848 $(130,393)
Depreciation and amortization 48,331 50,986
------------------------------------------------------------------------------------------------------
EBITDA $443,179 $ (79,407)
------------------------------------------------------------------------------------------------------
9
EBITDA, excluding the operating expenses of GSN: Government Security News which
was sold in September 2003, increased by $456,027 to $443,179, compared to a
loss of $12,848 for the same period in 2003. Revenues increased $1,048,155,
production, editorial and distribution costs increased $319,065 at Dan's Papers
Inc. and The Hill as previously explained, and selling expenses increased
$299,101 due largely to the establishment of a sales staff for Dan's Magazines,
and to higher sales commissions driven by the increase in advertising revenues.
General and administrative costs decreased $26,038 due primarily to a reduction
in bad debt expense.
Three months ended September 30, 2004 September 30, 2003
------------------------------------------------------------------------------ ------------------
EBITDA $ 443,179 $ (79,407)
Less: EBITDA from GSN - 66,559
---------------------------------------------------------------------------------------------------
EBITDA, excluding sold publication $ 443,179 $ (12,848)
---------------------------------------------------------------------------------------------------
Net income for the three months ended September 30, 2004 was $360,254, an
improvement of $374,987 from a net loss of $14,733 for the three months ended
September 30, 2003. Revenues increased $965,419 and operating expenses increased
$440,178. A gain of $123,316 was realized in September 2003 from the sale of a
publication, GSN: Government Security News. Net interest expense increased
$3,332, and the tax provision for the third quarter of 2004 was $21,182 compared
with a tax benefit of $2,424 for third quarter of 2003.
On a per share basis, the net income was $0.03 for the third quarter of 2004
compared with net loss of $0.00 per share for the third quarter of 2003. Diluted
net income per share for the third quarter of 2004 was $0.03 due to the assumed
conversion of convertible preferred stock and convertible debt.
Nine Months Ended September 30, 2004 Compared With Nine Months Ended September
30, 2003 Revenues
Revenues excluding those from a sold publication (GSN: Government Security News
which was sold in September 2003) increased $2,229,990, or 27%, to $10,458,493
in the third quarter of 2004 compared with $8,228,503 for the third quarter of
2003. Excluded revenues from the sold publication were $82,736 for the nine
months ended September 30, 2003. Overall revenues for the nine months ended
September 30, 2004 including the sold publication increased $2,147,254, or 26%,
from $8,311,239 to $10,458,493 compared with the nine months ended September 30,
2003. Variances in specific revenue categories for the nine months ended
September 30, 2004 excluding the sold publication were as follows: display
advertising, which represented 83% of total revenues, increased 27% to
$8,713,250 in 2004 compared with $6,880,449 in 2003, and classified advertising
increased 29% to $1,337,191 compared to $1,037,090 in 2003. Other revenue
increased $97,087 to $408,052 in 2004 compared with $310,965 in 2003, largely
due to management fees of $187,500 from Marquis Who's Who LLC.
Among the Company's individual publications, classified advertising was strong
at Dan's Papers Inc. increasing by $271,537, or 29%, in 2004 compared to 2003,
and display advertising increased 7% in 2004 compared to 2003. Display revenues
for Dan's Magazines, Dan's Hampton Style and Dan's Hampton Sports, increased
$728,207, or 122%. Revenues at The Hill increased by $893,436, or 27%, with
gains in display advertising that were driven by the general election and the
issues published at the national political conventions. The increase is also due
in part to the introduction of a third regular weekly issue in February 2004.
Operating Expenses
Operating expenses were $10,258,478 for the nine months ended September 30,
2004, an increase of 15%, compared with operating expenses of $8,948,812 for the
same period in 2003. Excluding expenses from a sold publication (GSN: Government
Security News which was sold in September 2003), operating expenses increased
$1,653,142 to $10,258,478 from $8,605,336 in 2003. This is largely attributed to
the investment in operating costs associated with the expansion of The Hill and
Dan's Hampton Style. Further operating costs were incurred in the third quarter
of 2004 on the expanded publication schedule for Dan's Hampton Style and on the
introduction of Dan's Hampton Sports. A third regular weekly issue of The Hill
was added to the publication schedule in February 2004. Previously in March
2003, expansion at The Hill began with the publication of a second regular
weekly issue.
10
Variances in specific expense categories, excluding the sold publication, were
as follows: editorial, production, and distribution increased $758,005, or 21%,
compared to 2003. This is primarily due to the costs associated with the
expansion of Dan's Hampton Style and Dan's Hampton Sports and The Hill, as
previously discussed. Selling expenses increased $624,990, or 32%, for nine
months ended September 30, 2004, compared to 2003, primarily due to higher sales
commissions on the revenue gains and to the addition of a sales staff for Dan's
Hampton Style and Dan's Hampton Sports. General and administrative expenses
increased $394,972, or 15%, for the nine months ended September 30, 2004
compared to the same period for 2003 due primarily to the overhead costs
associated with the establishment of Dan's Hampton Style and Dan's Hampton
Sports, and to the reduction of bad debt expenses in 2004 of $105,000
compared with a reduction of $155,000 in 2003.
Provision for Income Taxes
The Company recorded provisions for state and local income taxes of $85,956 and
$32,502, respectively, for the nine months ended September 30, 2004 and 2003.
Income
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
nine months ended September 30, 2004, improved by $835,201 from a loss of
$493,554 in the first nine months of 2003 to a profit of $341,647 in the first
nine months of 2004. Revenues increased $2,147,254 and there were gains in all
categories at each publication. Editorial, production, distribution, and selling
costs were higher, driven by the increase in the publication schedule of Dan's
Hampton Style and Dan's Hampton Sports and to the addition of a third weekly
issue of The Hill. The operating loss for the sold publication (GSN which was
sold in September 2003) for the nine months ended September 30, 2003 was
$259,862. General and administrative costs were higher for the nine months ended
September 30, 2004 due in part to the overhead costs associated with the
establishment of Dan's Hampton Style and Dan's Hampton Sports, and to a
reduction in bad debts of $105,000 in 2004 compared with a $155,000 reduction of
bad debt expense in 2003.
Reconcilations 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 gains or losses from the sale of subsidiaries.
Nine months ended September 30, 2004 September 30, 2003
---------------------------------------------------------------------------------- ----------------------
Earnings before interest, taxes, depreciation and amortization (EBITDA)
Income (loss) from operations $200,015 $(637,573)
Depreciation and amortization 141,632 144,019
-------------------------------------------------------------------------------------------------------------
EBITDA $341,647 $(493,554)
-------------------------------------------------------------------------------------------------------------
EBITDA, excluding the operating expenses net of revenues of the sold
publication, for the first nine months of 2004 improved by $575,339 to a profit
of $341,647 compared to loss of $233,692 for the same period in 2003. This is
primarily attributed to the revenue gains of $2,229,990, an increase in
editorial, production and distribution costs of $758,005, an increase in selling
expenses of $624,990, and an increase in general and administrative costs of
$271,656.
Nine months ended September 30, 2004 September 30, 2003
-------------------------------------------------------------------------------- ------------------
EBITDA $341,647 $(493,554)
Less: EBITDA from GSN - 259,862
------------------------------------------------------------------------------------------------------------
EBITDA, excluding sold publication $341,647 $(233,692)
------------------------------------------------------------------------------------------------------------
The net income for the first nine months of 2004 was $71,447, an improvement of
$645,800 from a net loss of $574,353 for the first nine months of 2003. This is
due in part to the operating loss of approximately $259,862
11
generated in the first nine months of 2003 by the publication that was sold and
to the gain of $123,316 on the sale of that publication which was completed in
September 2003. Additionally, the improvement is due to revenue gains of
$2,147,254 and an increase in operating costs of $1,049,805. Net interest
expense increased $15,018 and the provision for state and local income taxes
increased $53,454 in the first nine months of 2004.
On a per share basis, the net income was $0.01 for the first nine months of 2004
compared with net loss of $0.06 per share for the first nine months of 2003.
Diluted net income per share was $0.01 due to the assumed conversion of
convertible preferred stock and convertible debt.
Liquidity and Capital Resources
Cash as of September 30, 2004 was $230,667, excluding restricted cash of
$34,102, compared with $308,890, excluding restricted cash of $34,102, for the
same period in 2003. For the nine months ended September 30, 2004, total cash
used in operating activities was $919,006, compared to cash used in operating
activities of $531,893 for the same period in 2003. This was primarily
attributable to an increase in accounts receivable of $1,551,403 and an increase
in other assets of $45,739. Additionally, net income was $71,447, depreciation
and amortization was $141,632, and the provision for bad debts was approximately
$222,700. Accounts payable and accrued expenses increased $188,283, income taxes
payable increased $57,477, and related party payable increased $34,097.This was
partially offset by a decrease in other liabilities of $37,500.
Capital expenditures were $51,498. Cash provided by financing activities totaled
$794,502 and was primarily attributed to $846,000 in cash collected on notes
receivable. Payment of related party notes payable was $786,370. Payments
related to capital lease obligations were $17,087, payments on automobile loans
were $7,421, and dividends of $846 on preferred stock were accrued.
As of September 30, 2004, the Company had current assets of $2,760,794,
including cash of $230,667. At September 30, 2004, the Company had an excess of
current liabilities over current assets in the amount of $53,536. Included in
the current liabilities is a $300,000 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.
At September 30, 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 the sale of publications and 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 nine months ended September 30, 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. During the
third quarter of 2004, the Company continued the expansion of the publication of
Dan's Hampton Style and Dan's Hampton Sports. In February of 2004, the Company
continued weekly publication of a third issue of The Hill, which was published
certain weeks of the fourth quarter of 2003. Previously in March 2003, the
Company expanded publication of The Hill to twice a week on Tuesdays.
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 raised in 2003
from the sale of the Company's common stock. Payments due the Company from the
sale of publications were received in the amounts of $661,000, $175,000, and
$10,000 in the first, second, and third quarters of 2004, respectively. The
Company believes that it will have sufficient working capital to fund its
operations and obligations through December 31, 2004.
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ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 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 third quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits:
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.
+ Indicates that exhibit is attached hereto.
(b) Reports on Form 8-K:
None
13
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: November 22, 2004 /s/ James A. Finkelstein
------------------------
James A. Finkelstein
President and Chief Executive Officer
Date: November 22, 2004 /s/ E. Paul Leishman
--------------------
E. Paul Leishman
Chief Financial Officer
14