U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
X Annual report under Section 13 or 15(d) of the Securities
------- Exchange Act of 1934. For the fiscal year ended December
31, 2001.
OR
____ Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
________________ to ________________.
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
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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(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class: on which Registered:
------------------- -------------------
Common Stock, $0.01 par value None
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
-- --
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $13,581,542.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 28, 2002, is $3,738,806.
The number of shares of common stock outstanding as of March 13, 2002
was 10,685,811.
PART I
The information set forth in this Report on Form 10-KSB including,
without limitation, that contained in Item 6, Management's Discussion and
Analysis and Plan of Operation, contains "forward looking statements" within the
meaning of Section 27A of the Securities Act of 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.
Item 1. Description of Business
As used herein, unless the context requires otherwise, the terms "we,"
the "Company," or NCI refer to News Communications, Inc. together with its
subsidiaries.
Overview
News Communications, Inc. is a Nevada corporation formed in 1986.
Through our subsidiaries, one of which is majority owned, we publish and
distribute weekly advertiser-supported newspapers. We currently publish six
newspapers through four offices. The principal source of our revenues is selling
advertising space in our publications since the publications are principally
distributed free of charge.
Sale of Community Papers
Consistent with our mission to focus on growing our profitable core
properties, during 2001, we continued to dispose of assets that lost money. On
April 30, 2001, we sold substantially all of the assets of the Nassau Community
Newspaper Group, Inc. and South Shore Publishers, Inc. to NCN Acquisition LLC.
On August 3, 2001, we sold all of the shares of the Manhattan Newspaper Group
consisting of Access Network Corp., Manhattan Publishing Corp, and West Side
Newspapers Corp. to Manhattan Media Corp.
Present Publications
Our current Publications are as follows:
Publisher Publication
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Tribco Incorporated ("Tribco")...................Queens Tribune and the Western Queens Tribune, which are
published in nine editions, and the Press of Southeast Queens
Dan's Papers Inc.................................Dan's Papers and Montauk Pioneer
Capital Hill Publishing Corp.
("Capital Hill")............................The Hill
All of the subsidiaries are wholly owned except Dan's Papers Inc. which is 80%
owned by NCI.
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Dan's Papers
For the past 40 years Dan's Papers has been a favorite of all people
who visit or live in the Hamptons. Dan's Papers focuses on the lifestyle,
culture, arts, entertainment, politics and social issues of interest to the
resort areas of the South and North Forks of Eastern Long Island, New York,
particularly the wealthy Hamptons resort area. Its articles and columns include
humor, news, celebrity profiles, reviews of art gallery shows, restaurants,
concerts, nightclubs and movies, social satire, editorial cartoons and local
environmental and political issues, as well as a special section on real estate.
Dan's Papers is published weekly in tabloid format, with a glossy cover. It is
distributed to locations on Eastern Long Island, including art galleries, gift
shops, supermarkets, newspaper and card shops, restaurants and boutiques. There
is also weekly distribution in Manhattan.
The staff at Dan's Papers also publishes the Montauk Pioneer, which has
been designated by the Montauk Village Association as the official newspaper of
the community of Montauk, New York. Dan's Papers and Montauk Pioneer are
published in our offices in Bridgehampton, New York.
The Hill
The Company began publication of The Hill in September, 1994. The Hill
is a weekly newspaper devoted to the coverage of the United States Congress. In
just seven years the paper has become required reading for members of Congress,
their staff, and those who follow Congress. The paper, which offers
comprehensive coverage of every aspect of Congress and life on Capitol Hill, is
distributed free of charge to members of Congress and their staffs, governmental
agencies and others. Others who receive the publication include lobbyists,
government relation departments of corporations and similar groups. The Hill
derives the largest portion of its revenue from the sale of display advertising
to companies wishing to get their message in front of the decision-makers in
Congress. Additional revenues come from classified advertising and subscriptions
from the sale of the paper. The Hill is printed on newsprint and is operated out
of offices in Washington, D.C.
Queens Tribune
The Queens Tribune Group, started in 1970, consists of three weekly
community newspapers. These newspapers and their numerous editions service areas
in Queens County in New York City.
Both the Queens Tribune and the Press of Southeast Queens are printed
in a tabloid format with four-color cover and some additional color pages
inside. Editorial content focuses on local, borough-wide and occasionally
citywide political and social issues. Features include community news and
activities of the week, crime reports, restaurant reviews and similar matters of
interest to the targeted circulation area. Substantially all of the articles and
columns are written by the Tribune's editors and reporters. The Queens Tribune
has won numerous awards for journalistic excellence such as the New York Press
Association's coveted first place award for community leadership. The paper is
delivered through independent contractors to heavy traffic locations, such as
banks, supermarkets, and sidewalk distribution boxes. Our Tribco subsidiary
generates additional revenue by offering printing and graphics services to its
clients.
Printing and Production
Independent printing shops print each of our publications. We send the
printer completely composed, laid-out, typeset pages for photo-offset
reproduction. In each case, the printer is able to provide all of the necessary
materials, such as paper, ink, etc., for printing, and bills the Company for its
services and materials used. We believe that we obtain our printing services at
competitive prices, and if, for any reason, the arrangements that we have with
any of our printers should terminate, management
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believes that similarly favorable arrangements could be had with several other
printing shops in or around New York City. We use several printers and are not
overly reliant on any one vendor.
Advertisers and Readers; Marketing Activities
All publications are primarily controlled circulation. The Hill and one
edition of The Queens Tribune have paid circulation as well. The primary source
of our revenue is selling advertising space in the publications, although Tribco
offers graphic and printing services to third parties. The advertising revenues
for Dan's Papers and Queens Tribune are derived from a wide variety of
businesses and individuals reflecting the various opportunities, tastes and
demands of the residents of each of the targeted distribution areas. Advertisers
in The Hill are primarily companies who wish to make views known to Congress and
other entities that advertise employment positions. No one advertiser represents
more than 5% of our advertising revenues. We employ sales representatives who
are largely paid through incentive-based compensation packages.
Competition
We compete directly for advertising revenues with newspapers and
magazines that are sold to readers or are distributed free, as well as other
advertising media in the geographic and the vertical market in which we operate.
We do not significantly compete, however, with publishers of newspapers or
magazines for paid circulation revenues, as most of our publications are
distributed primarily free of charge to readers.
During the months from May through September, Dan's Papers serves the
same market as Hamptons Magazine, also a free circulation publication. Dan's
Papers is aimed at the same market as the East Hampton Star and the Southampton
Press, which are sold to readers and The Independent, a free weekly newspaper.
The Montauk Pioneer serves the community of Montauk and competes with the
Montauk Sun and Montauk Life publications.
The Queens Tribune and our other Queens publications compete with many
publications, including Newsday and the free circulation publications Queens
Chronicle and Queens Courier.
The Hill, which is the largest circulation paper on Capitol Hill,
services the same market as Roll Call, a twice weekly newspaper. The Hill also
competes for advertising with two other publications, The National Journal and
Congressional Quarterly.
Management believes that our publications are the largest in each of
our target areas.
Employees
As of December 31, 2001, we had 111 full-time and 7 part-time
employees, of whom 25 were editorial; 46 were engaged as display and classified
advertising sales personnel; 13 were engaged in production; and 34 were engaged
in administrative and clerical activities. We also maintain a roster of
free-lance contractors. Management considers its relations with its employees to
be satisfactory. None of our employees are represented by a union.
Seasonality
Dan's Papers and the Montauk Pioneer, which are resort area newspapers,
have significant seasonal variations in revenues. This seasonality may cause
operating results to vary significantly from quarter to quarter, with the third
fiscal quarter being the most significant in terms of revenues and income. The
Hill's revenues also vary throughout the year depending on whether or not
Congress is in session.
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Where You Can Find More Information
The Company files annual, quarterly and special reports, proxy
statements and other information with the SEC. Our SEC filings are available to
the public over the Internet at the SEC's web site at http://www.sec.gov. You
may also read and copy any document we file at the SEC's public reference room
in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.
Item 2. Description of Properties
The Company operates out of four separate locations.
On November 3, 1999, we entered into a five-year lease at 2 Park Avenue
in New York City. The 2,900 square feet of office space serves as our executive
offices including the centralization of our finance and administrative staff.
The annual base rent is approximately $94,000 per year.
Dan's Papers leases 2,810 square feet of office space in a building on
Montauk Highway, Bridgehampton, New York, at an annual rate of approximately
$76,000, plus cost-of-living increases, for a term of ten years terminating in
October 2008. We have an option to renew this lease for an additional five-year
term.
In fiscal 2000, Tribco renewed its lease for approximately 8,000 square
feet of office space at 174-15 Horace Harding Expressway, Fresh Meadows, New
York for five years resulting in a termination date of October 31, 2005. The
annual rent is approximately $152,000.
In 1999, Capital Hill Publishing Corp. renewed its lease for
approximately 4,000 square feet of office space at 733 15th Street, N.W.,
Washington, D.C. for five years terminating July 21, 2004. The annual rent is
approximately $97,000.
We believe that our present space is adequate for current purposes and
offers moderate expansion possibilities.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
During the last quarter of fiscal 2001, no matters were submitted to a
vote of security holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our shares trade on the OTC stock market under the trading symbol
"NCOM". Until May 15, 2001, our shares were quoted on the Nasdaq SmallCap stock
market. The following table sets forth, for the periods indicated, the range of
high and low closing bid quotations. The bid quotations set forth below reflects
inter-dealer prices, without retail mark-up, markdown or commission and may not
necessarily represent actual transactions.
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High Low
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Year Ended December 31, 2001
First Quarter............................................. $0.62 $0.28
Second Quarter............................................ $1.11 $0.31
Third Quarter............................................. $1.07 $1.01
Fourth Quarter............................................ $0.87 $0.81
Year Ended December 31, 2000
First Quarter............................................. $2.22 $1.19
Second Quarter............................................ $1.75 $1.06
Third Quarter............................................. $1.22 $0.88
Fourth Quarter............................................ $1.02 $0.28
On March 28, 2002, the last reported sales price for our shares was
$0.75 per share. At March 28, 2002, we had 1,091 stockholders of record.
We have never paid cash dividends on our common stock and do not expect
to pay such dividends in the foreseeable future. We currently intend to retain
any future earnings for use in our business. The payment of any future dividends
on our common stock will be determined by our Board in light of the conditions
then existing, including our financial condition and requirements, future
prospects, restrictions in future financing agreements, business conditions and
other factors deemed relevant by the Board.
Dividends on the 10% preferred stock are payable annually in an amount
of $500 per share of 10% preferred stock, in cash or in shares of common stock
having a fair market value of $500, payable on September 19th of each year.
Dividends on the 10% preferred stock may be paid in shares of common stock to
the extent NCI has sufficient authorized but unissued common stock even if we
have sufficient assets or net profits to pay such dividends in cash. Annual
dividends of $80 per share on the 8% preferred stock are paid quarterly in cash
on the last day of every February, May, August and November of each year. See
"Consolidated Financial Statements" for more information regarding our
securities and any dividends we have paid.
Recent Sale of Unregistered Securities
The securities described below were issued by us during 2001 and were
not registered under the Securities Act of 1933. Each of the transactions is
claimed to be exempt from registration with the SEC pursuant to Section 4(2) of
the Securities Act as transactions not involving a public offering. All of such
securities, other than the dividends paid on shares of preferred stock in shares
of common stock, are deemed to be restricted securities for the purposes of the
Securities Act.
1. On June 4, 2001, pursuant to the terms of a Subscription Agreement,
our President, James A. Finkelstein, acquired 750,000 shares of our common
stock at $1.00 per share, of which 500,000 shares were purchased in June 2001
and the balance were purchased on July 31, 2001, resulting in gross proceeds of
$750,000. The Company also issued to the President in consideration for his
investment in NCI 250,000 additional shares of common stock that a related
party surrendered to the Company. The President may be required to transfer
these shares back to the related party upon the occurrence of certain events.
As further consideration for the investment by the President, the Company
issued to Mr. Finkelstein 5-year warrants to purchase 3,000,000 shares of
common stock, of which 1,000,000 warrants have an initial exercise price of
$1.10 per share, 1,000,000 warrants have an initial exercise price of $1.50
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per share, and 1,000,000 warrants have an initial exercise price of $2.00 per
share. The warrants are not exercisable until May 16, 2002.
2. During March 2001, we issued an 8% convertible note in the face
amount of $200,000 to principal shareholders of the Company.
3. During April 2001, we drew down $300,000 under a revolving credit
facility, dated March 31, 2001, from principal shareholders of the Company
evidenced by an 8% revolving note.
4. On June 4, 2001, pursuant to a Subscription Agreement, D. H. Blair
Investment Banking Corp. purchased 250,000 shares of the Company's common stock
at a purchase price of $1.00 per share. The shares purchased were immediately
surrendered to the Company in order to allow the Company to issue the 250,000
shares to its President as above described.
5. On June 4, 2001, pursuant to a Subscription Agreement, D.H. Blair
Investment Banking Corp. converted $150,000 of the Company's 8% Convertible Note
plus accrued interest of $7,594.82 into 157,594 shares of our common stock
at a purchase price of $1.00 per share. At the same time, Rosalind Davidowitz
also consummated a subscription agreement pursuant to which Ms. Davidowitz
converted $1,000,000 of the Company's 8% Convertible Note plus accrued interest
of $38,575 into 1,038,575 shares of our common stock at a purchase price of
$1.00 per share.
6. Also on June 4, 2001, pursuant to a revolving credit agreement with
D.H. Blair Investment Banking Corp., we issued 300,000 5-year warrants to D.H.
Blair Investment Banking Corp. to purchase the Company's common stock at an
exercise price of $1.00 per share.
7. On October 18, 2001, we issued 19,106 shares of common stock in
connection with the conversion of 5,000 shares of our $10 Convertible Preferred
Stock.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of our
results of operations and financial condition. The discussion should be read in
conjunction with our audited consolidated financial statements and notes
thereto.
NCI Critical Accounting Policies
The NCI 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. Our significant accounting policies are described in Note
2 to the consolidated financial statements included in Item 7 of this Form 10-K.
Revenue Recognition. We believe our most critical accounting policies
include revenue recognition. Display advertising revenues are earned when the
advertisements appear in our publications. Approximately 82% of revenues from
continuing operations are from display advertising sales and 12% is from
classified advertising sales. Unearned revenues of approximately $106,000 at
December 31, 2001 represent future classified advertisement for which customers
have paid in advance.
Allowance for Uncollectible Accounts Receivable. The preparation of
financial statements requires management to make estimates of the collectability
of our accounts receivable. Management specifically analyzes accounts receivable
and historical bad debts, customer credit-worthiness and current
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economic trends when evaluating the adequacy of the allowance for doubtful
accounts. Our accounts receivable balance was approximately $1.5 million, net of
allowance for doubtful accounts at December 31, 2001.
Long-Lived Assets. Long-lived assets such as intangibles and property
and equipment are amortized over their useful lives. Useful lives are based on
management's estimates of the period that the assets will generate revenue.
Intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Other than the loss on sale of subsidiaries, no impairment losses
have been necessary through December 31, 2001.
Income Taxes. We have a history of operating losses. These losses
generated a sizeable federal tax net operating loss, or NOL, carryforward of
approximately $15.4 million as of December 31, 2001. Generally accepted
accounting principles require that we record a valuation allowance against the
deferred tax asset associated with this NOL if it is "more likely than not" that
we will not be able to utilize it to offset future taxes. We have provided a
100% valuation allowance on deferred tax assets resulting from the NOL. We
currently provide for income taxes only to the extent that we expect to pay cash
taxes (primarily state and local taxes and the federal alternative minimum tax)
for current income. It is possible that the Company could become profitable and
that a portion or all of the NOL carry forward would be realized. Upon reaching
that conclusion, the estimated net realizable value of the deferred tax asset
would be recorded and a provision for income taxes would be established at the
combined federal and state effective rates.
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Revenue
Primarily due to the sale of several business units, revenues in 2001
decreased 27% to $13,581,542 compared with $18,662,501 in 2000. Excluding
revenues from sold businesses (Bronx, Brooklyn, Nassau and Manhattan newspapers
that were sold in June and December 2000 and April and August 2001), overall
revenues decreased $204,913, or 2%, compared with the year 2000 and reflects the
overall advertising softness in the industry that was further impacted by the
terrorist attacks in New York City and Washington, D.C., on September 11, 2001.
Variances in specific revenue categories excluding revenues from sold businesses
are as follows: Display advertising, which accounted for 82% of total sales,
decreased by $174,390, or 2%, to $9,309,923 for the year 2001 from $9,484,313
for the year 2000; classified advertising increased by $85,481, or 7%, to
$1,346,988 in 2001 from $1,261,507 in 2000; and commercial printing decreased by
$31,778, or 7%, to $424,345 in 2001 from $456,123 in 2000.
Among the individual continuing operating units, total revenues for
Dan's Papers were essentially flat with strong classified performance offsetting
reduced display advertising; revenues for The Hill increased by $172,328, or 5%,
for the year 2001 compared to the year 2000, with strong performance in display
advertising in the fourth quarter; and revenues for The Queens Tribune decreased
by $294,786, or 8%, for the year 2001 compared to the year 2000 due to the
impact of the September 11, 2001 terrorist attack in New York on the local
economy.
Operating Expenses
Operating expenses for the year 2001 were $15,216,261, a decrease of
24% compared with operating expenses of $20,148,372 for the year 2000, primarily
due to the sale of subsidiaries. Operating expenses excluding expenses from sold
businesses (Bronx, Brooklyn, Nassau and Manhattan newspapers that were sold in
June and December 2000 and April and August 2001), for 2001 increased by
$110,188, or 1%, to $12,511,612 from $12,401,424 in 2000 for the reasons
discussed below.
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Variances in specific expense categories excluding sold businesses are
as follows: editorial expenses increased by $136,409 or 14% reflecting our
continuing investment in the content side of our publications along with the
addition of the Press of Southeast Queens and costs associated with a new glossy
insert that is included in Dan's Papers for the summer months; production and
distribution expenses were up $264,659, or 7%, reflecting the increased
production volume from Dan's Papers, The Hill, and the Press of Southeast
Queens; selling expenses were up by $178,210, or 8%, reflecting increased
classified advertising commissions at Dan's and new development costs at The
Hill; and general and administrative expenses decreased by $509,619, or 10%, due
in part to a one time charge in 2000 of approximately $313,000 related to the
departure of the president and chief executive officer of the company in
December, 2000 and a general reduction in costs.
Operating expenses for the second half of 2001 decreased by $3,697,588,
or 37%, to $6,316,666 in 2001 compared to $10,041,254 for the second half of
2000. Expense reductions of approximately $3,200,000 were due to sold
businesses. Additionally, the variance was due to overhead cost cutting
measures, a reduction in corporate staff salaries of approximately $178,000,
and a one time charge in 2000 of approximately $313,000 related to the
departure of the former President and Chief Executive Officer of the Company
in December 2000.
Operating expenses excluding expenses from sold businesses (Bronx,
Brooklyn, Nassau and Manhattan newspapers that were sold in June and December
2000 and April and August 2001), for the second half of 2001 decreased by
$476,569, or 7%, to $6,040,104 from $6,516,673 for the same period in 2000.
Income
EBITDA (earnings before interest, taxes, depreciation and amortization)
for the second half of 2001 improved by $341,977, from a loss of $708,304 in the
second half of 2000 to a loss of $366,327 in the second half of 2001. Despite a
decline in revenues in the second half of 2001, this variance was due in part to
overhead cost cutting measures, a reduction in corporate staff salaries of
approximately $178,000, a concentration on core products, and a one time charge
in 2000 of approximately $313,000. 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.
EBITDA does not include gains or losses from the sale of subsidiaries.
EBITDA excluding sold businesses, for the second half of 2001 improved
by $323,262, to a loss of $267,067, compared to a loss of $590,329 for the same
period in 2000.
However, EBITDA for the full year 2001 was a loss of $1,301,442
compared with a loss of $1,159,935 for the year 2000. This is attributed
primarily to the decline in advertising revenues, higher editorial, production
and distribution costs previously discussed, which included a new section in
Dan's Papers. As discussed the trend was a significant improvement in the second
half of 2001.
EBITDA excluding sold businesses, for the full year 2001 increased by
$269,271, to a loss of $845,484, compared to an operating loss of $576,213 for
the same period in 2000. This is attributed to the decline in advertising
revenues, higher editorial, production and distribution costs previously
discussed.
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Net loss for the full year 2001 increased to $2,797,062 from a net loss
of $1,594,600 for the full year 2000. This is due largely to the loss on sales
of subsidiaries that were previously discussed of approximately $918,000.
Additionally, approximately $280,000 was attributed to the decline in
advertising revenues, higher editorial, production and distribution costs
previously discussed, which included a new section in Dan's Paper, and to state
and local income tax expense on taxable profits.
Sale of Subsidiaries
On April 30, 2001, NCI sold substantially all of the assets of the
Nassau Community Newspaper Group, Inc. and South Shore Publishers, Inc. to NCN
Acquisition LLC. Nassau was the publisher of eight weekly and one monthly
newspaper. Most of the titles were purchased in 1993. The balance were started
by NCI in 1996 and 1997 except for the South Shore Record, a 33 year-old mailed
subscription newspaper serving Nassau County that was acquired in 1997. The
Nassau newspapers were not profitable and management believed that it would be
beneficial for the Company to sell the Nassau newspapers and focus on growing
its other properties.
On August 3, 2001, NCI sold the stock of the wholly owned subsidiaries
that comprise the Manhattan Newspaper Group (Access Network Corp., Manhattan
Publishing Corp., and West Side Newspaper Corp.) to Manhattan Media Corp., a
management-led buyout team headed by the publisher of the group. The Manhattan
Newspaper Group was the publisher of four weekly newspapers and has historically
generated operating losses. Management believed that it would be beneficial for
the Company to sell the Manhattan newspapers and focus on growing its other
properties. See Note 15 of Notes to Consolidated Financial Statements.
Income Taxes
We currently have a net operating loss (NOL) carryforward for federal
income tax purposes of approximately $15,400,000, which is available to offset
federal taxable income through the fiscal year 2020. We have provided a 100%
valuation allowance on deferred tax assets substantially resulting from the NOL
carryforward discussed above. We recorded a provision of approximately $163,000
for state and local income taxes for the year ended December 31, 2001.
Effects of Inflation
We do not believe that inflation has had a significant impact on our
financial position or the results of operations in the past three years.
Retirement of Outstanding Indebtedness
As described in "Liquidity and Capital Resources" below, on June 4,
2001, we effectively converted our debt and accrued interest of $1,196,169 into
shares of common stock. At December 31, 2001, we have an 8% Convertible Note in
the principal amount of $200,000 that is due on the earlier of (a) January 1,
2002, or (b) upon the next round of equity financing.
Liquidity and Capital Resources
During the year 2001, the total cash used in operations was $1,525,676
primarily attributable to a net loss of $2,797,062 for the year. Cash provided
by investing activities totaled $247,690 as capital expenses of $387,310 were
offset by the $635,000 in proceeds from the sale of substantially all of the
assets and liabilities of Nassau Community Newspaper Group and South Shore
Publishers, Inc., and the Manhattan Newspaper Group.
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Cash provided from financing activities was $1,180,101 and included the
sale of 750,000 shares of common stock and 3,000,000 warrants to the President
of the Company, the sale of 250,000 shares of common stock to a related party,
the issuance of an 8% Convertible Note in the principal amount of $200,000, to a
related party on March 7, 2001, and advances of $300,000 under a loan facility
made available by a related party on April 4, 2001 which were repaid with
interest of $54,011 by the Company on June 4, 2001, and conversion to common
stock of 250,000 shares.
As of December 31, 2001, we had current assets of approximately
$2,311,000, including cash of approximately $597,000. At December 31, 2001 we
had an excess of current assets over current liabilities in the amount of
approximately $197,000. For the past year, the Company has relied on financing
in the form of convertible notes, including a $1,000,000 Revolving Credit
Facility to meet seasonal cash requirements. As previously discussed, we have
sold subsidiaries that historically did not generate positive cash flow.
Additionally, the Company implemented cash management improvements in the fourth
quarter of 2001 and is now realizing increased cash flow compared to the
previous year. As of January 31, 2002, cash generated from operating activities
approximated $362,000 compared with cash used in operating activities as of
January 31, 2001 of approximately $203,700. The cash balance at January 31, 2002
was approximately $580,000 compared with approximately $294,000 as of January
31, 2001. Management believes that with its existing cash position and the
increased cash flow due to the increasing strength of our businesses and the
increased cash flow due to the seasonality of our businesses during the second
and third quarters, we will have sufficient working capital to fund our
operations for at least the next twelve months.
Item 7. Financial Statements
The consolidated financial statements of NCI and its subsidiaries,
including the notes thereto, together with the report thereon of BDO Seidman,
LLP is presented beginning at page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Our executive officers, directors and other significant employees and
their ages and positions are as follows:
Name of Individual Age Position with NCI and Subsidiaries
------------------------------------------------------------------------------------------------------------------
James A. Finkelstein 53 President, Chief Executive Officer and Director of NCI and its
subsidiaries.
------------------------------------------------------------------------------------------------------------------
Jerry Finkelstein (1)(2) 86 Chairman of the Board of Directors of NCI.
------------------------------------------------------------------------------------------------------------------
Wilbur L. Ross, Jr. (1) 64 Director of NCI
------------------------------------------------------------------------------------------------------------------
Michael Schenkler 56 Director of NCI.
------------------------------------------------------------------------------------------------------------------
E. Paul Leishman 54 Chief Financial Officer and Secretary of NCI.
------------------------------------------------------------------------------------------------------------------
Martin A. Bell (2) 50 Director of NCI.
------------------------------------------------------------------------------------------------------------------
Gary Weiss (1)(2) 39 Director of NCI.
------------------------------------------------------------------------------------------------------------------
Robert E. Nederlander (3) 67 Director of NCI.
------------------------------------------------------------------------------------------------------------------
Martin Mendelsohn (3) 59 Director of NCI.
------------------------------------------------------------------------------------------------------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
James A. Finkelstein has been President, Chief Executive Officer and
Director of NCI since June 2001. Mr. Finkelstein has served as a Director of
American Lawyer Media, Inc. since December 1997. Prior to that, Mr. Finkelstein
served as President and Chief Executive Officer of The New York Law Journal
Publishing Company and its predecessor companies beginning in 1974. He joined
The New York Law Publishing Company in 1970. He is the former publisher of The
New York Law Journal and the founder and publisher of The National Law Journal.
He also serves as media advisor to DB Capital Partners.
Jerry Finkelstein has been Chairman of the Board of Directors since
1993, and a Director of NCI since December 1987. He served as publisher of The
New York Law Journal from 1960 to 1984. Mr. Finkelstein is a former member of
the Board of Directors of Rockefeller Center, Inc., Chicago Milwaukee
Corporation, Chicago Milwaukee Railroad Corporation and TPI Enterprise, Inc.,
formerly Telecom Plus International Inc., a communications company. He is also a
former Commissioner of the Port Authority of New York and New Jersey.
Wilbur L. Ross, Jr. was elected a Director of NCI in October 1996. Mr.
Ross served as Chief Executive Officer of NCI from October 1996 to August 1999.
From 1988 to March 2000, Mr. Ross had been Executive Managing Director of
Rothschild Inc. and Chairman of Rothschild Recovery Fund and Asia Recovery Fund.
On April 1, 2000, Mr. Ross purchased the controlling interest in the General
Partner of these funds and Rothschild Recovery Fund was renamed WLR Recovery
Fund. Mr. Ross
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resigned from Rothschild Inc. and organized WL Ross & Co. L.L.C., a merchant
banking firm with offices in New York, Seoul, Korea and Tokyo, Japan. Mr. Ross
is a Director of Mego Financial Corp., a developer of timeshare properties, Syms
Corp., a clothing retailer, Tong Yang Life Insurance Co. (Korea) and Kansai
Sawayaka Bank (Japan). He also serves as a member of the Alternative Investments
Committee of the New York Society of Security Analysts.
Michael Schenkler has been a Director of NCI since March 1990, and
served as president from December 1991 to July 1999. He has been publisher of
The Queens Tribune since 1979. Prior to taking over the Queens Tribune in 1982,
Mr. Schenkler spent 15 years as an educator employed by the Board of Education
of New York City, where he served as a teacher, assistant principal and
principal.
E. Paul Leishman has been Chief Financial Officer of NCI since June
2001 and was Corporate Controller since September 2000. From August 1996 through
December 1999, Mr. Leishman was Corporate Controller of Thomson Newspapers, Inc.
Prior to that time, Mr. Leishman has held management positions at other major
media companies including Conde Nast Publications, BPI Communications, Inc., and
Harcourt Brace and Company.
Martin A. Bell has been a Director of NCI since July 29, 1999. He has
been Vice Chairman of D.H. Blair Investment Banking Corporation since December
1995, prior to which time he served as Senior Vice President and General Counsel
to the firm. He is also a Director of Venus Exploration, Inc.
Gary Weiss has been a Director of NCI since July 29, 1999. He has been
President of Weiss Capital Group LLC, an investment and consulting firm since
1997. From 1992 to 1997, Mr. Weiss was a managing Director of Bennis & Reissman
Inc.
Robert E. Nederlander has been a Director of NCI since October 1996.
Since 1981, he has been President and/or Director of Nederlander Organization,
Inc., the owner and/or operator of one of the world's largest chains of
legitimate theaters. Mr. Nederlander is also a Director of Riddell Sports, Inc.,
a sporting goods manufacturer, Mego Financial Corp., Allis Chalmers Corp., and
Cendant Corp.
Martin Mendelsohn has been a Director of NCI since July 29, 1999. From
1992 through 2001, he was a partner at Verner, Liipfert, Bernhard, McPherson and
Hand. Since 2001, he has been a partner at Schnader Harrison Segal & Lewis.
The directors serve until the next annual meeting of stockholders and
until their respective successors are elected and qualified. Officers serve at
the discretion of the Board of Directors.
Committees of the Board of Directors
The Board currently has three committees: the Executive Committee, the
Audit Committee and the Compensation Committee.
The Executive Committee is comprised of Messrs. James A. Finkelstein,
Jerry Finkelstein, Ross and Weiss. Mr. Ross serves as Chairman of the Executive
Committee.
The Audit Committee is comprised of Messrs. Nederlander and Mendelsohn.
The Audit Committee recommends the independent accountants appointed by the
Board to audit our financial statements, which includes an inspection of our
books and accounts, and reviews with such accountants the scope of their audit
and their report thereon, including any questions and recommendations that may
arise relating to such audit and report or our internal accounting and auditing
system procedures.
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The Compensation Committee is comprised of Messrs. Jerry Finkelstein,
Bell and Weiss. The function of the Compensation Committee is to review and
approve the compensation of executive officers and establish targets and
incentive awards under our incentive compensation plans. The Compensation
Committee reports to the Board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors and persons who own more than ten percent of a registered
class of such company's equity securities to file reports of ownership and
changes in ownership with the SEC. Officers, directors and ten percent
stockholders are required by regulation to furnish us with copies of all Section
16(a) forms they file. To the best of our knowledge (based solely upon a review
of the Forms 3, 4 and 5 filed), no officer, director or 10% beneficial
shareholder failed to file on a timely basis any reports required by Section
16(a) of the Securities Exchange Act of 1934 during the year ended December 31,
2001.
Item 10. Executive Compensation.
Summary Compensation Table
The following table sets forth information for the fiscal years ended
December 31, 2001, December 31, 2000 and November 30, 1999 concerning the
compensation paid and awarded to all individuals serving as our executive
officers at December 31, 2001 and those officers or key employees who were
employed at December 31, 2001 whose total annual salary and bonus during that
year exceeded $100,000:
SUMMARY COMPENSATION TABLE
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Annual Compensation Long-Term Compensation
--------------------------------------------------------------------------------------------------------------------------
Other Securities
Annual Restricted Under-
Compens- Stock lying All Other
Salary Bonus ation Awards Options Compensa-
Name and Principal Position Year ($) ($) ($) ($) (#) tion
--------------------------------------------------------------------------------------------------------------------------
James A. Finkelstein, President 2001 $83,000 --- --- --- 3,333 ---
and Chief Executive Officer
--------------------------------------------------------------------------------------------------------------------------
E. Paul Leishman, Chief Financial 2001 $113,942 $5,000 --- --- --- ---
Officer & Secretary
--------------------------------------------------------------------------------------------------------------------------
Michael Schenkler, Director and 2001 $164,255 $20,573 --- --- 3,333 ---
Publisher of Queens Tribune 2000 $164,255 --- --- --- 18,333 ---
1999 $164,900 --- --- --- 3,333 ---
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--------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
--------------------------------------------------------------------------------------------------------------------------
Daniel Rattiner, Publisher and 2001 $167,434 $53,036 --- --- --- ---
Editor of Dan's Papers 2000 $157,947 $16,777 --- --- --- ---
1999 $149,343 $183,117 --- --- 15,000 ---
--------------------------------------------------------------------------------------------------------------------------
Martin Tolchin, 2001 $206,545 $70,868 --- --- --- ---
Editor-in-Chief and Publisher 2000 $200,000 $41,037 --- --- --- ---
of The Hill 1999 $182,060 $180,092 --- --- 45,000 ---
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
--------------------------------------------------------------------------------------------------------------------------
Percent of Total Exercise or
Number of Securities Options Granted to Base Price
Name Underlying Options Employees In Fiscal Year ($/Sh) Expiration Date
--------------------------------------------------------------------------------------------------------------------------
James A. Finkelstein 3,333 12.5% $1.00 08/17/06
--------------------------------------------------------------------------------------------------------------------------
Michael Schenkler 3,333 12.5% $1.00 08/17/06
--------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
----------------------------------------------------------------------------------------
Number of securities
Value underlying unexercised
Shares Realized options at fiscal year-end(#)
Acquired On ($) ---------------------------------
Name Exercise (#) (c) Exercisable Unexercisable
----------------------------------------------------------------------------------------
James A. Finkelstein --- --- 3,333 ---
----------------------------------------------------------------------------------------
Michael Schenkler --- --- 9,999 15,000
----------------------------------------------------------------------------------------
Daniel Rattiner --- --- --- 15,000
----------------------------------------------------------------------------------------
Martin Tolchin --- --- 30,000 15,000
----------------------------------------------------------------------------------------
None of the options granted are presently in the money.
Employment Agreements
On May 8, 2001 the Company entered into a Letter Agreement with James
A. Finkelstein pursuant to which Mr. Finkelstein is employed as President and
Chief Executive Officer, of NCI. Mr. Finkelstein's employment commenced June 4,
2001 at an annual salary of $150,000, subject to 5% increase on January 1, 2001
and each year thereafter. In addition to his base salary, we provide Mr.
Finkelstein with medical and certain other benefits and perquisites.
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On July 29, 1999, the Board of Directors and Mr. Jerry Finkelstein
agreed to amend Jerry Finkelstein's employment agreement as Chairman of the
Board of Directors to reduce his annual salary to $95,000 from $195,000. Under
the terms of the agreement which ends August 19, 2003, Mr. Jerry Finkelstein,
may also be paid annual bonuses at the discretion of the Board, based upon such
factors as our results of operations and transactions involving us which are
introduced to us by Mr. Jerry Finkelstein or in which he is otherwise involved
on our behalf. We also provide Mr. Jerry Finkelstein with medical and certain
other benefits and perquisites. Mr. Jerry Finkelstein may terminate the
agreement at any time by giving us at least 10 days' notice. In the event of his
permanent disability or death, salary and bonuses shall continue to be paid to
him or the legal representative of his estate until the end of the term of the
agreement, August 19, 2003.
On November 25, 1997, the Company entered into an Employment and
Shareholder's Agreement with Daniel Rattiner, pursuant to which, we employed Mr.
Rattiner to serve as Publisher and Editor of Dan's Papers. Mr. Rattiner's
employment commenced on October 18, 1997 and continues for a 10-year period,
subject to earlier termination as set forth in the agreement. As compensation
for his services, we currently pay Mr. Rattiner a base salary of $167,434,
subject to adjustment based on the Consumer Price Index. In addition to his base
salary, we pay Mr. Rattiner a bonus based on net profits for the fiscal year and
provide Mr. Rattiner with medical and certain other benefits.
In December 1999, we entered into an Employment Agreement with Martin
Tolchin, pursuant to which we employed Mr. Tolchin to serve as Editor-in-Chief
and Publisher of The Hill for a term commencing on January 1, 2000 and ending on
December 31, 2002. Mr. Tolchin is entitled to a 2.5% phantom equity interest in
The Hill. Mr. Tolchin currently receives an annual base salary of $211,000,
subject to adjustment based on the Consumer Price Index. In addition to his base
salary, Mr. Tolchin receives a bonus based on the earnings of The Hill for the
fiscal year and medical and certain other benefits. Mr. Tolchin may terminate
the agreement at any time. In the event of his death, salary and bonuses shall
continue to be paid to the legal representative of his estate for a period of
six months following his death. If we terminate Mr. Tolchin for any reason other
than for "Cause", we must pay his salary and bonus through the end of the term
of the agreement.
Director Compensation
We have no established compensation arrangements with our directors
except as described in the next paragraph. On August 17, 1993, the Board also
adopted a Non-Discretionary Directors Stock Option Plan pursuant to which, as
adjusted, the Board may award up to 166,667 shares of common stock to directors
of NCI and its subsidiaries. However, on August 17 of each year, we have granted
to each existing director a five-year option to purchase 3,333 shares of our
common stock at the market price on the date of grant pursuant to our
Non-Discretionary Directors Stock Option Plan.
Directors' and Officers' Options
On August 17, 1993, the Board adopted a Discretionary Directors and
Officers Stock Option Plan pursuant to which the Board may award options to
purchase an aggregate of 500,000 shares of common stock to directors and
officers of NCI and its subsidiaries which shall be exercisable at the market
price on the date of grant for periods, and under conditions, specified by
the Board in such grants. Options under the Discretionary Option Plan are
non-qualified and non-incentive options for purposes of income taxation and
are not intended to qualify under Section 422A of the Internal Revenue Code
of 1986.
On December 21, 1999, the Board adopted a 1999 Stock Incentive Plan
pursuant to which the Board may award options to purchase an aggregate of
200,000 shares of our common stock to directors,
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officers, employees and consultants. Options under the 1999 Stock Incentive Plan
may be non-qualified or incentive stock options for purposes of income taxation
under Section 422 of the Internal Revenue Code of 1986. All qualified incentive
stock options granted under the plan must have an exercise price at least equal
to Fair Market Value (as defined in the plan) as of the grant date while
non-qualified stock options may be granted at an exercise price less than Fair
Market Value.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding ownership
of our common stock, as of March 7, 2001 by each person known to us to own
beneficially more than 5% of our outstanding common stock, by each person who is
a director of NCI, by each person listed in the Summary Compensation Table and
by all directors and officers of NCI as a group.
The information contained in the table was furnished by the persons
listed therein. The calculations of the percent of shares beneficially owned are
based on 10,685,811 shares of common stock outstanding on March 7, 2001 plus
with respect to each such person the number of additional shares that will be
outstanding upon exercise of the warrants and options exercisable within sixty
(60) days set forth herein.
Beneficial Ownership Current
Name and Address of common stock (1) Percent of Class
---------------- ------------------- ----------------
James A. Finkelstein 4,171,333(2)(3) 30.14%
Two Park Avenue, Suite 1405
New York, NY 10016
Martin A. Bell 9,999(3)(10) *
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, NY 10005
J. Morton Davis 2,970,284(9)(10) 26.83%
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, NY 10005
Jerry Finkelstein 664,000(3)(4) 5.99%
35 East 76th Street
New York, NY 10021
Martin Mendelsohn 9,999(3) *
Schnader Harrison Segal, & Lewis
1300 I Street, NW
11th Floor East
Washington, D.C. 20005
Robert E. Nederlander 49,879(3)(5) *
1450 Broadway, 20th Floor
New York, NY 10018
Daniel Rattiner 43,836(11) *
c/o Dan's Paper
2221 Montauk Highway
Bridgehampton, NY 11932
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Beneficial Ownership Current
Name and Address of common stock (1) Percent of Class
---------------- ------------------- ----------------
Wilbur L. Ross, Jr. 759,584(3)(5)(6) 6.89%
101 E. 52nd Street, 19th Floor
New York, NY 10022
Michael Schenkler 207,143(3)(7) 1.94%
174-15 Horace Harding Expressway
Fresh Meadows, NY 11365
Martin Tolchin 30,000(3) *
c/o Capital Hill Publishing Corp.
733 15th Street N.W. Suite 1140
Washington, DC 20005
Gary Weiss 159,999(3) 1.48%
Weiss Capital Group LLC
99 Seaview Blvd.
Port Washington, NY 11050
Melvyn I. Weiss 1,241,216(5)(8) 11.53%
One Pennsylvania Plaza
New York, NY 10119
Paul Leishman 0 *
Two Park Avenue, Suite 1405
New York, NY 10016
All Directors and Executive Officers as a 6,031,936(12) 40.72%
Group (9 persons)
* Less than one percent.
(1) James Finkelstein, Jerry Finkelstein and his affiliates, Wilbur L. Ross,
Melvyn Weiss and his affiliates and J. Morton Davis and his affiliates (the
"Davis Group") entered into a Stockholders' Agreement dated as of May 8,
2001 (the "Stockholders' Agreement"). The Stockholders' Agreement provides
that, subject to limited exceptions, Mr. Finkelstein has an irrevocable
proxy to vote all of the shares held by each member of the Davis Group (the
"Davis Shares") until such time as Mr. Finkelstein ceases to be employed as
the President and Chief Executive Officer of the Registrant. By virtue of
the irrevocable proxy granted to Mr. Finkelstein by the Davis Group under
the terms of the Stockholders' Agreement, Mr. Finkelstein currently has
sole voting power with respect to 4,324,752 shares of common stock owned by
the Davis Group and 22,546 votes as a result of the 5,900 shares of $10
Convertible Preferred Stock owned by the Davis Group. Accordingly, as of
the date hereof, together with the shares beneficially owned by Mr.
Finkelstein, Mr. Finkelstein has sole voting power with respect to an
aggregate of 5,515,298 shares of our common stock, or 50.88% of our issued
and outstanding Common Stock.
(2) Includes 3,000,000 shares issuable upon exercise of 5-year warrants owned
by James A. Finkelstein and are not exercisable until May 16, 2002, and
150,000 warrants that were exercisable on June 4, 2001.
(3) Includes the following numbers of shares purchasable upon the exercise of
presently exercisable options and warrants: Mr. James A. Finkelstein-3,333;
Mr. Bell--9,999; Mr. Jerry Finkelstein--399,999; Mr. Mendelsohn--9,999; Mr.
Nederlander--11,666; Mr. Ross--78,333; Mr. Schenkler--9,999; Mr. G.
Weiss--159,999; Mr. Tolchin--30,000.
(4) Includes
(a) 9,945 shares owned by The Jerry Finkelstein Foundation, Inc., of which
Jerry Finkelstein is President, and
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(b) 66,667 shares owned by Jerry Finkelstein's wife.
(5) Includes the following numbers of shares issuable upon conversion of shares
of $10 convertible preferred stock: Mr. Nederlander--38,213 Mr. M.
Weiss--76,426; Mr. Ross--152,852.
(6) Includes 100,000 shares issuable upon exercise of warrants owned by the WLR
Recovery Fund L.P.
(7) Does not include 13,678 shares owned by Mr. Schenkler's wife as custodian
for two minor children of which Mr. Schenkler disclaims beneficial
ownership.
(8) Includes 457,304 shares owned by the M&B Weiss Family Partnership.
(9) Includes
(a) 2,454,999 shares of common stock and warrants to purchase 150,000
shares owned by D.H. Blair Investment Banking Corp., of which J.
Morton Davis is a Director and the sole stockholder, and 129,567
shares owned directly by Mr. Davis.
(b) 22,546 shares of common stock issuable upon exercise of 5,900 shares
of $10 convertible preferred stock and
(c) 213,172 shares of common stock to be issued upon conversion of 8%
Convertible Notes owned by D.H. Blair Investment Banking Corp.
Does not include
(d) 41,006 shares owned by Rivkalex Corporation ("Rivkalex"), a private
corporation owned by Rosalind Davidowitz, Mr. Davis's wife, and
(e) 1,821,317 shares of common stock owned by Rosalind Davidowitz. Mr.
Davis and D.H. Blair Investment Banking Corp. expressly disclaim
beneficial ownership of all securities held by Rivkalex and Rosalind
Davidowitz.
(10) Does not include 2,454,999 shares of common stock, warrants to purchase
150,000 shares of Common Stock, 22,546 shares of common stock issuable upon
conversion of $10 preferred stock, and 213,172 shares of Common Stock
issuable upon conversion of 8% convertible notes owned by D.H. Blair
Investment Banking Corp., of which Martin A. Bell is Vice Chairman. Mr.
Bell expressly disclaims beneficial ownership of all securities held by
D.H. Blair Investment Banking Corp.
(11) Includes 167 shares owned by Mr. Rattiner's wife.
(12) Includes shares issuable upon exercise of the options referenced in (3)
above, shares described in (4), (8),(9)(a)-(c) and (11) above, conversion
of the $10 convertible preferred stock referenced in (5) above, and
exercise of the warrants in (2) and (6) above.
Item 12. Certain Relationships and Related Transactions.
On June 4, 2001, pursuant to the terms of a Subscription Agreement, our
President, James A. Finkelstein, acquired 750,000 shares of NCI's common stock
at $1.00 per share, of which 500,000 shares were purchased in June 2001 and the
balance were purchased on July 31, 2001 resulting in gross proceeds of $750,000.
The Company also issued to the President in consideration for his investment in
NCI 250,000 additional shares of common stock that a related party surrendered
to the Company. The President may be required to transfer these shares back to
the related party upon the occurrence of certain events. As further
consideration for the investment by Mr. Finkelstein, the Company issued 5-year
warrants to purchase 3,000,000 shares of common stock, of which 1,000,000
warrants have an initial exercise price of $1.10 per share, 1,000,000 warrants
have an initial exercise price of $1.50 per share, and 1,000,000 warrants have
an initial exercise price of $2.00 per share. The warrants are not exercisable
until May 16, 2002. Pursuant to the Letter Agreement, dated May 8, 2001, between
the Company, James A. Finkelstein and holders of a majority of the Company's
outstanding shares, these controlling shareholders agreed, subject to certain
conditions, to vote in favor of consummating a plan pursuant to which the
Company would become a private entity, if such plan were as described in the
Letter Agreement and if such plan were proposed before May 15, 2002. Such
transaction, if consummated would result in Mr. Finkelstein owning a majority
of the shares of NCI.
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On June 4, 2001, pursuant to a Subscription Agreement, D. H. Blair
Investment Banking Corp purchased 250,000 shares of our common stock at a
purchase price of $1.00 per share. The shares purchased were immediately
surrendered to the Company.
On June 4, 2001, pursuant to a Subscription Agreement, D.H. Blair
Investment Banking Corp., converted $150,000 of the Company's 8% Convertible
Note plus accrued interest of $7,594.82 into 157,594 shares of the our common
stock at a purchase price of $1.00 per share. At the same time, Rosalind
Davidowitz converted $1,000,000 of the Company's 8% Convertible Note plus
accrued interest of $38,575 into 1,038,575 shares of the our common stock at a
purchase price of $1.00 per share.
Also on June 4, 2001, in connection with the consummation of the
transactions contemplated by the Letter Agreement with Mr. Finkelstein, the
Company repaid D.H. Blair Investment Banking Corp., $300,000 plus accrued
interest representing outstanding advances under a certain Revolving Note dated
March 30, 2001, and the corresponding revolving credit facility was terminated.
Upon payment in full of the revolving loans, in accordance with the terms of the
agreement pursuant to which the loan was made, the Company issued 300,000 5-year
warrants to D.H. Blair Investment Banking Corp. to purchase the Company's common
stock at an exercise price of $1.00 per share.
Pursuant to a Separation Agreement dated December 11, 2000, Steven
Farbman resigned as President, Chief Executive Officer and Director of NCI
and its subsidiaries. As part of the agreement, we agreed, among other things,
to accelerate Mr. Farbman's 125,000 unvested shares of our common stock so that
Mr. Farbman owned a total of 250,000 shares of our common stock on the date of
agreement. We then agreed to purchase in installments from Mr. Farbman all of
such shares at a purchase price of $2.00 per share, for an aggregate of
$500,000. Mr. Farbman waived all other further rights, if any, in options
stock or other equity issue of NCI and agreed to certain non-competition and
non-solicitation provisions. As part of the separation, NCI and Mr. Farbman
also entered into mutual releases.
During March 2001, the Company received $200,000 which was evidenced by
an 8% Convertible Note from a principal shareholder of the Company. Principal
and interest are due on the earlier of (a) January 1, 2003, or (b) upon the next
round of equity financing. As of December 31, 2001, accrued interest was
$13,172. The holder of the 8% Convertible Note has the right to convert the
principal amount and accrued interest under the note at a conversion price of
$1.00 per share at any time before the payment in full of such amounts due under
the notes.
During April 2001, the Company received $300,000 from a principal
shareholder of the Company pursuant to a revolving credit facility that was
dated March 31, 2001. Under terms of the revolving credit facility, the
principal shareholders made available on a revolving basis from time to time up
to $1,000,000. The revolving credit advances were evidenced by an 8% revolving
credit note. The aggregate amount of the Revolving Loans and interest were due
on the earlier of (a) March 31, 2002, or (b) upon the next round of equity
financing, or (c) receipt of proceeds (net of any anticipated costs or expenses
associated therewith) from a sale of a subsidiary. The holders of the revolving
note had the right to convert the principal amount and accrued interest under
the revolving note at a conversion price of $1.00 per share at any time before
the payment in full of such amounts due under the Loan.
On December 6, 2000, we issued an 8% Convertible Note in the principal
amount of $1,000,000 to Rosalind Davidowitz and on October 17, 2000, we issued
an 8% Convertible Note in the principal amount of $150,000 to D.H. Blair
Investment Banking Corp. Principal and interest under both notes are payable on
the earlier of (a) December 31, 2001 or (b) the date that NCI consummates its
next round of equity financing. Interest on the notes accrues at 8% per annum
and we have the right to prepay the notes, in whole or in part, at any time upon
10 days prior written notice to the payees. Ms. Davidowitz and D.H. Blair each
have the right to convert the principal amount and accrued interest under their
respective notes at a conversion price of $1.00 per share at any time before the
payment in full of such amounts due under the notes. Such conversion price is
subject to adjustment upon certain events set forth in the notes. These Notes
were discharged on June 4, 2000 as described above.
-20-
The transactions described above are on terms as favorable to NCI as
those that could have been obtained from independent third parties and
arms-length negotiations.
Item 13. Exhibits, List and Reports on Form 10-KSB.
(a) Exhibits
Incorporated by
Exhibit Reference from Exhibit No. in
Number Description Document Referenced Document
3.1 Articles of Incorporation of the company (formerly known as A 3.1
Applied Resources, Inc.), filed with the Secretary of State of
the State of Nevada on May 20, 1986.
3.1.1 Certificate of Amendment of the Articles of Incorporation of the A 3.1.1
company, filed with the Secretary of State of the State of Nevada
on December 8, 1987.
3.1.2 Certificate of Amendment of the Articles of Incorporation of the B 3.1.2
company, filed with the Secretary of State of Nevada on August
16, 1990.
3.1.3 Certificate of Amendment of the Articles of Incorporation of the C 3.1.3
company, filed with the Secretary of the State of Nevada on July
26, 1994.
3.2 By-Laws of the company (as amended and restated). C 3.2.1
4.1 Form of Common Stock Certificate. B 4.1
4.2 Certificate of Designation of 10% Convertible Preferred Stock. Q 4.2
4.2.1 Certificate of Designation of 8% Convertible Preferred Stock. Q 4.2.1
4.2.2 Certificate of Amendment of Certificate of Designation of 8% Q 4.2.2
Convertible Preferred Stock.
4.2.3 Certificate of Designation of $10 Convertible Preferred Stock H 10.33
(included as part of Exhibit 10.21).
4.3 Form of Rights Certificate. L 4.3
10.1 1987 Stock Option Plan, as amended. G 10.1.1
10.2 1999 Stock Option Plan. Q 10.2
10.3 Discretionary Directors and Officers Stock Option Plan. C 10.2.1
10.4 Non-discretionary Directors Stock Option Plan. C 10.2.2
10.5 Stockholders' Agreement, dated as of October 13, 1988, between D 2.1
Daniel Rattiner and the company.
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Incorporated by
Exhibit Reference from Exhibit No. in
Number Description Document Referenced Document
10.6 Agreement of Lease, dated October 31, 1988, by and between D 2.4
Daniel Rattiner and DP Acquisition Corp., for premises located on
Montauk Highway, Bridgehampton, New York.
10.7 Amendment of Lease, dated October 31, 1998, by and between L 10.6
Dan's Paper's Inc. (f/k/a D.P. Acquisition, Inc.) and Daniel
Rattiner.
10.8 Lease for space at 174-15 Horace Harding Expressway, Fresh B 10.25
Meadows, New York.
10.9 Agreement of Lease, dated as of July 26, 2000, by and between Q 10.9
Max Five NY, LLC and Manhattan Publishing Corp. for premises
located at 63 West 38th Street, New York, New York and Guaranty
by News Communications, Inc.
10.10 Lease Agreement, dated November 3, 1999, by and between News Q 10.10
Communications, Inc. and Two Park Company for premises
located at 2 Park Avenue, New York, New York.
10.11 Agreement of Sublease by and between All Metro Aids, Inc. and Q 10.11
Nassau Community Newspapers, Inc. for premises located at
33 Atlantic Avenue, Lynbrook, New York.
10.12 Lease Agreement, dated June 28, 1994, by and between 15th & H Q 10.12
Street Associates and Capitol Hill Publishing Company, Inc.
for premises located at 733 15th Street, N.W., Washington, D.C.
10.13 Letter Agreement, dated June 15, 1990, by and between Dan's B 10.21
Papers, Inc. and Dan's Papers, Ltd.
10.14 Letter dated November 22, 1996 from News Communications, Inc. J 10.4.4
to Daniel Rattiner regarding exercise of option to
purchase stock of Dan's Papers, Ltd.
10.15 Employment and Stockholders' Agreement dated as of November K 10.4.5
25, 1997 by and between News Communications, Inc. and
Daniel Rattiner.
10.16 Amended and Restated Employment Agreement dated October 28, J 10.7.4.1
1996, by and between Jerry Finkelstein and News Communications,
Inc.
10.17 Letter Agreement dated July 29, 1999 by and between Jerry P 10.24
Finkelstein and News Communications, Inc.
10.18 Stock Option Agreement dated September 1, 1993, by and between C 10.11
Jerry Finkelstein and News Communications, Inc.
10.19 Employment Agreement dated December 1999 by and between Martin Q 10.19
Tolchin and News Communications, Inc.
-22-
Incorporated by
Exhibit Reference from Exhibit No. in
Number Description Document Referenced Document
10.20 Warrant dated May 17, 1996, to purchase 400,000 shares of News H 10.31
Communications, Inc.'s common stock issued by News
Communications, Inc. to D.H. Blair Investment Banking Corp.
10.21 Warrant dated May 21, 1996, to purchase 200,000 shares of News H 10.32
Communications, Inc.'s common stock issued by News
Communications, Inc. to D.H. Blair Investment Banking Corp.
10.22 Form of Subscription Agreement made as of October 4, 1996 by H 10.33
and among News Communications, Inc. and persons designated
therein as "Purchasers," including Exhibit 1 thereto, form of
Certificate of Designation of $10.00 Convertible Preferred Stock,
and Exhibit 2 thereto, form of Warrant.
10.23 Form of Standby Agreement, dated January 12, 1998, by and L 10.25
among News Communications, Inc., Wilbur L. Ross, Jr., Melvyn I.
Weiss and J. Morton Davis, as amended.
10.24 Subscription Agreement, dated July 28, 1999, by and between N 10.5
News Communications, Inc., Wilbur L. Ross, Jr., Melvyn I.
Weiss and J. Morton Davis.
10.25 Stock Option Agreement, dated July 28, 1999, by and between P 10.23
News Communications, Inc. and Jerry Finkelstein.
10.26 Stock Option Agreement, dated July 28, 1999, by and between P 10.25
News Communications, Inc. and Gary Weiss.
10.27 Stock Option Agreement, dated August 16, 1999, by and between P 10.26
News Communications, Inc. and Paul Mastronardi.
10.28 Agreement regarding Stay-Put Bonus, dated November 21, 2000, Q 10.28
by and between Paul Mastronardi and News Communications, Inc.
10.29 8% Convertible Note, dated October 17, 2000, in the principal Q 10.29
amount of $150,000 issued by News Communications, Inc. in
favor of D.H. Blair Investment Banking Corp.
10.30 8% Convertible Note, dated December 6, 2000, in the principal Q 10.30
amount of $1,000,000 issued by News Communications, Inc. in
favor of Rosalind Davidowitz.
10.31 Separation Agreement dated December 11, 2000 by and between Q 10.31
Steven A. Farbman, News Communications, Inc. and J. Morton
Davis.
10.32 8% Convertible Note, dated March 7, 2001, in the principal Q 10.32
amount of $200,000 issued by News Communications, Inc. in
favor of D.H. Blair Investment Banking Corp.
-23-
Incorporated by
Exhibit Reference from Exhibit No. in
Number Description Document Referenced Document
10.33 Subscription Agreement, dated March 7, 2001, by and between Q 10.33
News Communications, Inc. and D.H. Blair Investment Banking Corp.
10.34 Subscription Agreement, dated October 17, 2000, by and between Q 10.34
D.H. Blair Investment Banking Corp. and News Communications, Inc.
10.35 Subscription Agreement, dated December 6, 2000, by and between Q 10.35
News Communications, Inc. and Rosalind Davidowitz.
10.36 Loan Agreement, dated as of March 30, 2001, by and between Q 10.36
News Communications, Inc. and D.H. Blair Investment Banking Corp.
10.37 Revolving Note, dated March 30, 2001, in the principal amount Q 10.37
of $1,000,000 issued by News Communications, Inc. in favor
of D.H. Blair Investment Banking Corp.
10.38 Letter Agreement dated as of May 8, 2001 by and between News R 10.1
Communications, Inc. and James Finkelstein.
10.39 Stockholders' Agreement dated as of May 8, 2001 by and among R 10.2
Jerry Finkelstein, The Finkelstein Foundation, Inc., Shirley
Finkelstein, Wilbur L. Ross, Jr.; Melvyn I. Weiss, M&B Weiss
Family Partnership, J. Morton Davis, D.H. Blair Investment
Banking Corp., Rivkalex Corporation, Rosalind Davidowitz, and
James Finkelstein.
10.40 Subscription Agreement dated as of May 8, 2001 by and between R 10.3
News Communications, Inc. and D.H. Blair Investment Banking
Corp. for the purchase of 250,000 shares of common stock.
10.41 Subscription Agreement dated as of May 8, 2001 by and between R 10.4
News Communications, Inc. and D.H. Blair Investment Banking
Corp. for the purchase of 150,000 shares of common stock.
10.42 Subscription Agreement dated as of May 8, 2001 by and between R 10.5
News Communications, Inc. and Rosalind Davidowitz for the
purchase of 1,000,000 shares of common stock.
10.43 Subscription Agreement dated as of May 8, 2001 by and between R 10.6
News Communications, Inc. and James Finkelstein for the
purchase of 750,000 shares of common stock.
10.44 Warrant to purchase 1,000,000 shares of common stock of News R 10.7
Communications, Inc. at 1.10 per share issued to James
Finkelstein.
-24-
Incorporated by
Exhibit Reference from Exhibit No. in
Number Description Document Referenced Document
10.45 Warrant to purchase 1,000,000 shares of common stock of News R 10.8
Communications, Inc. at $1.50 per share, dated as of May 8,
2001 and issued to James Finkelstein.
10.46 Warrant to purchase 1,000,000 shares of common stock of News R 10.9
Communications, Inc. at $2.00 per share, dated as of May 8,
2001 and issued to James Finkelstein.
10.47 Warrant Purchase Agreement dated as of April 19, 2001 by R 10.10
and between D.H. Blair Investment Banking Corp. and James Finkelstein.
10.48 Warrant to purchase 150,000 shares of common stock of News R 10.11
Communications, Inc. at $1.00 per share, dated June 4, 2001
and issued to D.H. Blair Investment Banking Corp.
10.49 Warrant to purchase 150,000 shares of common stock of News R 10.12
Communications, Inc. at $1.00 per share, dated June 4, 2001
and issued to James Finkelstein.
10.50 Stock Purchase Agreement, dated August 3, 2001, by and between S 10.50
News Communications, Inc. and Manhattan Media Corp.
10.51 5% Promissory Note, dated August 3, 2001, in the principal S 10.51
amount of $550,000 issued by Manhattan Media Corp. in favor
of News Communications, Inc.
21 Subsidiaries of News Communications, Inc. *
Notes:
A Annual Report of the company on Form 10-K for the year ended November 30,
1987.
B Registration Statement of the company on Form S-1, No. 33-35484.
C Registration Statement of the company on Form S-1, No. 33-46467.
D Current Report of the company on Form 8-K relating to events occurring on
October 31, 1988.
E Annual Report of the company on Form 10-KSB for the year ended November 30,
1992.
F Annual Report of the company on Form 10-KSB for the year ended November 30,
1994.
G Annual Report of the company on Form 10-KSB for the year ended November 30,
1995.
H Quarterly Report of the company on Form 10-QSB for the quarter ended August
31, 1996.
I Current Report of the company on Form 8-K/A relating to events occurring on
February 3, 1997.
J Annual Report of the company on Form 10-KSB/A for the year ended November
30, 1996.
K Annual Report of the company on Form 10-KSB for the year ended November 30,
1997.
L Registration Statement on Form SB-2 (Registration No. 333-67407), declared
effective by the SEC on January 14, 1999.
M Annual Report of the company on Form 10-KSB40 for the year ended November
30, 1998.
N Current Report of the company on Form 8-K relating to events occurring on
July 28, 1999.
O Current Report of the company on Form 8-K relating to events occurring on
December 15, 1999.
P Annual Report of the company on Form 10-KSB for the year ended November 30,
1999.
Q Annual Report of the company on Form 10-KSB for the year ended December 31,
2000.
R Current Report of the company on Form 8-K relating to events occurring on
June 4, 2001.
S Quarterly Report of the company on Form 10-QSB for the quarter ended June
30, 2001.
------------------------
* Filed herewith.
(b) No reports were filed on Form 8-K during the last quarter of fiscal year
2001.
-25-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: April 16, 2001
NEWS COMMUNICATIONS, INC.
By: /s/ James A. Finkelstein
------------------------------------------
James A. Finkelstein
President & Chief Executive Officer,
By: /s/ E. Paul Leishman
------------------------------------------
E. Paul Leishman
Chief Financial Officer & Secretary
In accordance with the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ James A. Finkelstein President & Chief Executive Officer April 16, 2002
------------------------------------
James A. Finkelstein
/s/ E. Paul Leishman Chief Financial Officer & Secretary April 16, 2002
------------------------------------
E. Paul Leishman
/s/ Jerry Finkelstein. Chairman of the Board of Directors April 16, 2002
------------------------------------
Jerry Finkelstein
/s/ Wilbur L. Ross, Jr. Director April 16, 2002
------------------------------------
Wilbur L. Ross, Jr.
/s/ Michael Schenkler Director April 16, 2002
------------------------------------
Michael Schenkler
Director April 16, 2002
------------------------------------
Martin A. Bell
/s/ Gary Weiss Director April 16, 2002
------------------------------------
Gary Weiss
/s/ Robert E. Nederlander Director April 16, 2002
------------------------------------
Robert E. Nederlander
/s/ Martin Mendelsohn Director April 16, 2002
------------------------------------
Martin Mendelsohn
-26-
News Communications, Inc.
and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 2001 and 2000
F-1
News Communications, Inc.
and Subsidiaries
Contents
Independent auditors' report F-3
Consolidated financial statements:
Balance sheet F-4
Statements of operations F-5
Statements of stockholders' equity (deficit) F-6
Statements of cash flows F-7
Notes to consolidated financial statements F-8-F-34
F-2
Independent Auditors' Report
Board of Directors and Stockholders of
News Communications, Inc.
We have audited the accompanying consolidated balance sheet of News
Communications, Inc. and Subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of News Communications,
Inc. and Subsidiaries as of December 31, 2001, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
BDO Seidman, LLP
/s/ BDO Seidman, LLP
New York, NY
February 21, 2002
F-3
News Communications, Inc.
and Subsidiaries
Consolidated Balance Sheet
December 31, 2001
---------------------------------------------------------------------------------------------------------------------
Assets
Current:
Cash $ 596,505
Accounts receivable, net of allowance for doubtful accounts of $1,391,000 1,523,822
Other 190,737
---------------------------------------------------------------------------------------------------------------------
Total current assets 2,311,064
Restricted cash 102,305
Notes receivable, net of current portion 675,000
Property and equipment, net 566,444
Intangible assets, net 788,151
Other, net 123,446
---------------------------------------------------------------------------------------------------------------------
$4,566,410
=====================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 681,370
Accrued expenses 974,201
Income taxes payable 36,916
Unearned revenue 105,885
Capital leases, current portion 16,102
Other current liabilities 300,000
---------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,114,474
Capital leases, net of current portion 34,887
Due to related parties 213,172
---------------------------------------------------------------------------------------------------------------------
Total liabilities 2,363,073
---------------------------------------------------------------------------------------------------------------------
Minority interest 642,438
---------------------------------------------------------------------------------------------------------------------
Commitments
Stockholders' equity:
Preferred stock, $1.00 par value; 500,000 shares authorized; 192,535 shares
issued and outstanding, $2,044,500 aggregated liquidation value 192,535
Common stock, $.01 par value; authorized 100,000,000 shares; 10,844,144
shares issued and 10,685,811 outstanding 108,441
Paid-in capital - preferred stock 1,703,349
Paid-in capital - common stock 25,550,672
Deficit (25,502,369)
---------------------------------------------------------------------------------------------------------------------
2,052,628
Less: Treasury stock (158,333 common shares) - at cost 491,729
---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,560,899
---------------------------------------------------------------------------------------------------------------------
$4,566,410
=====================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
News Communications, Inc.
and Subsidiaries
Consolidated Statements of Operations
Year ended December 31, 2001 2000
---------------------------------------------------------------------------------------------------------------------
Net revenues $13,581,542 $18,662,501
---------------------------------------------------------------------------------------------------------------------
Expenses:
Editorial 1,428,027 1,724,769
Production and distribution 4,710,878 6,600,957
Selling 3,158,122 4,043,010
General and administrative 5,544,957 7,344,620
Depreciation and amortization 374,277 435,016
---------------------------------------------------------------------------------------------------------------------
Total expenses 15,216,261 20,148,372
---------------------------------------------------------------------------------------------------------------------
Loss from operations (1,634,719) (1,485,871)
Loss on sale of subsidiaries (917,696) (4,498)
Gain on disposal of unconsolidated entity 0 22,687
---------------------------------------------------------------------------------------------------------------------
Loss before interest expense, minority (2,552,415) (1,467,682)
interest in income of subsidiary and
provision (benefit) for income taxes
Interest expense, net 40,648 26,637
Minority interest in income of subsidiary 41,000 109,080
---------------------------------------------------------------------------------------------------------------------
Loss before provision (benefit) for
income taxes (2,634,063) (1,603,399)
Provision (benefit) for income taxes 162,999 (8,799)
---------------------------------------------------------------------------------------------------------------------
Net loss $(2,797,062) $(1,594,600)
=====================================================================================================================
Loss per common share:
Basic and diluted $ (.29) $ (.19)
=====================================================================================================================
Weighted average number of common shares outstanding:
Basic and diluted 9,743,819 8,432,582
=====================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
News Communications, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2001 and December 31, 2000
Preferred stock Paid-in Common stock
---------------------- capital- ----------------------
Shares Amount preferred stock Shares Amount
----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 197,835 $197,835 $2,036,540 7,022,007 $70,219
Conversion of 200 shares 12%
preferred to 31,746 shares of
common stock (200) (200) (191,800) 31,746 317
Conversion of 100 shares 8%
preferred to 15,873 shares of
common stock (100) (100) (96,391) 15,873 159
Issuance of 1,548,869 shares
of common stock - par $.01
at $1.75 - - - 1,548,869 15,489
Stock issued as preferred
dividends - - - 10,374 104
Treasury stock purchases - - - - -
Dividends on preferred stock - - - - -
Net loss - - - - -
----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 197,535 197,535 1,748,349 8,628,869 86,288
Issuance of 1,000,000 shares
of common stock - par $.01
at $1.00 - - - 1,000,000 10,000
Conversion of 8% Convertible
Notes and accrued interest to
1,196,169 shares of common
stock - - - 1,196,169 11,962
Conversion of 5,000 shares $10
preferred to 19,106 shares of
common stock (5,000) (5,000) (45,000) 19,106 191
Dividends on preferred stock - - - - -
Net loss - - - - -
----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 192,535 $192,535 $1,703,349 10,844,144 $108,441
================================================================================================================
Paid-in
capital- Total
common Treasury stockholders'
stock Deficit stock equity (deficit)
-------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $20,445,714 $(21,097,951) $(408,729) $1,243,628
Conversion of 200 shares 12%
preferred to 31,746 shares of
common stock 191,683 - - -
Conversion of 100 shares 8%
preferred to 15,873 shares of
common stock 96,332 - - -
Issuance of 1,548,869 shares
of common stock - par $.01
at $1.75 2,695,031 - - 2,710,520
Stock issued as preferred
dividends 10,396 (10,500) - -
Treasury stock purchases (112,500) - (83,000) (195,500)
Dividends on preferred stock - (1,128) - (1,128)
Net loss - (1,594,600) - (1,594,600)
-------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 23,326,656 (22,704,179) (491,729) 2,162,920
Issuance of 1,000,000 shares
of common stock - par $.01
at $1.00 990,000 - - 1,000,000
Conversion of 8% Convertible
Notes and accrued interest to
1,196,169 shares of common
stock 1,184,207 - - 1,196,169
Conversion of 5,000 shares $10
preferred to 19,106 shares of
common stock 49,809 - - -
Dividends on preferred stock - (1,128) - (1,128)
Net loss - (2,797,062) - (2,797,062)
-------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $25,550,672 $(25,502,369) $(491,729) $1,560,899
=======================================================================================================
See accompanying notes to consolidated financial statements.
F-6
News Communications, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
For the year ended December 31
2001 2000
--------------------------------------------------------------------------------------
Cash flows from operating activities of continuing
operations:
Net loss $(2,797,062) $(1,594,600)
Adjustments to reconcile net loss to net cash
used in operating activities of continuing
operations:
Depreciation and amortization 374,277 435,016
Provision for doubtful accounts 418,644 806,350
Minority interest 41,000 109,080
Gain on sale of unconsolidated entity - (22,687)
Loss on sale of subsidiaries 917,696 4,498
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (167,846) (1,191,659)
Other current assets 32,585 74,907
Restricted cash (102,305) -
Other assets 41,920 109,663
Related party receivable - 17,566
Increase (decrease) in:
Accounts payable and accrued expenses (451,352) (407,249)
Other liabilities 166,767 303,874
Related party payable - (184,149)
--------------------------------------------------------------------------------------
Net cash used in operating activities of
continuing operations (1,525,676) (1,539,390)
--------------------------------------------------------------------------------------
Cash flows from investing activities of continuing
operations:
Capital expenditures (387,310) (791,372)
Investment in unconsolidated entities - (31,194)
Proceeds from sale of subsidiaries 635,000 432,000
Proceeds from sale of unconsolidated entity - 225,000
--------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities of continuing operations 247,690 (165,566)
--------------------------------------------------------------------------------------
Cash flows from financing activities of continuing
operations:
Proceeds from issuance of common stock and
warrants 1,000,000 2,710,520
Payment of related party notes payable (304,011) (2,500,000)
Dividend on preferred stock (1,128) (1,128)
Proceeds from related party notes payable 500,000 1,150,000
Purchase of treasury stock - (195,500)
Payment of capital lease obligations (14,760) (14,834)
--------------------------------------------------------------------------------------
Net cash provided by financing activities
of continuing operations 1,180,101 1,149,058
--------------------------------------------------------------------------------------
Net decrease in cash (97,885) (555,898)
Cash, beginning of year 694,390 1,250,288
--------------------------------------------------------------------------------------
Cash, end of year $ 596,505 $ 694,390
======================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 138,847 $ 29,366
Cash paid during the year for income taxes 108,000 8,528
Stock issued as preferred dividend - 10,500
Conversion of related party notes payable and
accrued interest to common stock 1,196,169 -
Common stock issued to President 250,000 -
Conversion of preferred stock into common stock 50,000 288,491
Purchases of equipment under capital leases 44,888 61,756
Disposal of assets - notes received 725,000 126,000
======================================================================================
See accompanying notes to consolidated financial statements.
F-7
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Description of Business - News Communications,
Industry Segment Inc., a Nevada corporation, through its
subsidiaries, one of which is majority-owned,
publishes and distributes advertiser-supported,
community-oriented newspapers. The Company's
publishing subsidiaries are, Tribco Incorporated
("Tribco"), Dan's Papers, Inc. ("DPI"), and
Capital Hill Publishing Corp. ("Capital Hill").
News Communications, Inc. and Subsidiaries ("NCI,"
or the "Company") function in one industry
segment, which is the news publication business.
On April 30, 2001, NCI sold substantially all of
the assets and liabilities of the Nassau Community
Newspaper Group, Inc. and South Shore Publishers,
Inc. On August 3, 2001, NCI completed the sale of
Manhattan Newspaper Group. On June 15, 2000, the
Company completed the sale of substantially all of
the assets and liabilities of the Parkchester
Publishing Co., Inc. On December 12, 2000, the
Company sold the stock of Brooklyn Newspaper
Publishing, Inc. ("Brooklyn") (see Note 15).
2. Summary of Significant Principles of Consolidation - The consolidated
Accounting Policies financial statements of the Company include the
accounts of the parent company and its
subsidiaries. All intercompany accounts and
transactions have been eliminated.
Use of Estimates - The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at
the date of the financial statements and the
reported amounts of revenues and expenses during
the reporting period. Estimates have been made by
management with respect to the Company's allowance
for doubtful accounts, amortization relating to
goodwill and tradenames, among other items. Actual
results could differ from those estimates.
F-8
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Property and Equipment - All expenditures for
betterments and additions are capitalized.
Expenditures for normal repairs and maintenance
are charged against income as incurred.
Depreciation and amortization are provided for
financial reporting purposes on the basis of the
various estimated useful lives of the assets,
using the straight-line method as follows:
Years
--------------------------------------------------------- ----------------------
Furniture, fixtures and office equipment 5-10
Leasehold improvements Shorter of useful
life of asset or
length of lease
Computer equipment 5
Distribution boxes 5
--------------------------------------------------------- ----------------------
Tradenames - Tradenames are amortized over twenty
years on a straight-line basis.
Goodwill - Goodwill represents the excess of the
cost of acquired assets over their fair values at
dates of acquisition and is being amortized over
twenty years on a straight-line basis.
Revenue Recognition - Advertising revenues are
earned when advertisements appear in the various
publications. Unearned revenues of $105,885 at
December 31, 2001, represent future advertisements
that have been paid for by customers in advance.
Management specifically analyzes accounts
receivable and historical bad debts, customer
credit-worthiness and current economic trends when
evaluating the adequacy of the allowance for
doubtful accounts.
Seasonality - One of the Company's publications
(which generated approximately 32% of revenues for
the year ended December 31, 2001 and approximately
24% for the year ended December 31, 2000 is a
resort-area newspaper, that earns a significant
portion of its revenue during the summer months.
F-9
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Concentration of Customers - The majority of the
Company's customers are located in Washington,
D.C., Eastern Long Island and Queens County of New
York City.
Concentrations of Credit Risk - Financial
instruments that potentially subject the Company
to concentrations of credit risk are cash and
accounts receivable arising from its normal
business activities. The Company routinely
assesses the financial strength of its customers
and, based upon factors surrounding the credit
risk of its customers, establishes an allowance
for uncollectible accounts and, as a consequence,
believes that its accounts receivable credit risk
exposure beyond such allowance is limited. The
Company places its cash with high credit quality
financial institutions. The Company has not
experienced any losses with financial
institutions. The amount on deposit in any one
institution that exceeds federally insured limits
is subject to credit risk. As of December 31,
2001, the Company had no funds with financial
institutions subject to a credit risk beyond the
insured amount.
Loss Per Common Share - Basic loss per share
includes no dilution and is computed by dividing
loss available to common shareholders by the
weighted average number of common shares
outstanding for the period. Diluted loss per share
reflects the potential dilution from the assumed
exercise of stock options, warrants and conversion
of preferred stock. Common stock equivalents were
not included in the calculations in 2001 or 2000
since their effects were anti-dilutive.
Accordingly, basic and dilutive earnings per share
did not differ for the years ended December 31,
2001 and December 31, 2000.
For the years ended December 31, 2001 and 2000,
options to purchase 752,325 and 1,010,661 shares
of common stock, warrants to purchase 3,432,222
and 598,454 shares of common stock, convertible
preferred shares convertible into 752,645 and
669,441 shares of common stock, and convertible
notes convertible into 213,172 and 88,767 shares
of common stock, respectively, were not included
in the computation of diluted loss per share
because the effect would be anti-dilutive.
F-10
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Income Taxes - Income taxes are calculated using
the liability method specified by Statement of
Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." SFAS No. 109,
requires a company to recognize deferred tax
liabilities and assets for the expected future tax
consequences of events that have been recognized
in a company's financial statements or tax
returns. Under this method, deferred tax
liabilities and assets are determined based on the
difference between the financial statement
carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in
the years in which the differences are expected to
reverse. Deferred tax assets are reduced by a
valuation allowance to the extent realization is
uncertain.
Stock Options - The Company accounts for stock
options in accordance with SFAS No. 123
"Accounting for Stock-Based Compensation", which
allows a choice of either the intrinsic value
method or the fair value method of accounting for
employee stock options. The Company has elected to
use the current intrinsic value method.
Long-Lived Assets - Long-lived assets, such as
intangibles and property and equipment, are
evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of
the assets may not be recoverable through the
estimated undiscounted future cash flows from the
use of these assets. When any such impairment
exists, the related assets will be written down to
fair value. Other than the loss on sale of
subsidiaries, no impairment losses have been
necessary through December 31, 2001.
Shipping and Handling Costs - Shipping and
handling costs billed to customers are recorded as
revenue and are immaterial. The costs associated
with shipping goods to customers are recorded as
an operating expense.
3. Property and Equipment Major classes of property and equipment are as
follows:
December 31, 2001
-------------------------------------------------------------------------------
Leasehold improvements $ 256,625
Computer equipment and software 521,450
F-11
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001
-------------------------------------------------------------------------------
Furniture, fixtures and office equipment 199,760
Distribution boxes 48,198
-------------------------------------------------------------------------------
1,026,033
Less: Accumulated depreciation and amortization 459,589
-------------------------------------------------------------------------------
Property and equipment, net $566,444
===============================================================================
Property and equipment included assets under
capital leases at December 31, 2001 with a cost of
$61,756 and accumulated depreciation of $18,527.
Depreciation expense for the years ended December
31, 2001 and December 31, 2000 amounted to
$212,337, and $192,244, respectively.
4. Intangible Assets Intangible assets consist of goodwill and
tradenames. Intangibles are amortized on a
straight-line basis over 20 years. Trade names and
goodwill as of December 31, 2001 consisted of:
December 31, 2001
-------------------------------------------------------------------------
Goodwill $712,359
Tradenames 1,425,000
-------------------------------------------------------------------------
2,137,359
Less: Accumulated amortization:
Goodwill 449,677
Tradenames 899,531
-------------------------------------------------------------------------
$788,151
=========================================================================
Amortization expense of $161,940 and $242,772 was
recognized for the years ended December 31, 2001
and December 31, 2000.
F-12
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
5. Related Parties During the year 2000, the Company received
$1,150,000 in the form of 8% Convertible Notes
payable to principal shareholders of the Company.
The notes and interest were due on December 31,
2001, or earlier, upon the next round of equity
financing. The lender had the right to convert the
principal amount and all accrued interest thereon
into full shares of the Company's common stock at
$1.00 per share at any time before the payment in
full of principal and accrued interest.
During March 2001, the Company received $200,000
in the form of an 8% Convertible Note from
principal shareholders of the Company. Principal
and interest are due on the earlier of (a) January
1, 2003, or (b) upon the next round of equity
financing and have a stated interest rate of 8%
per annum. As of December 31, 2001, accrued
interest was $13,172. The holders of the 8%
Convertible Note have the right to convert the
principal amount and accrued interest under the
note at a conversion price of $1.00 per share at
any time before the payment in full of such
amounts due under the notes.
During April 2001, the Company received $300,000
in the form of an 8% Revolving Note from a
revolving credit facility that was dated March 31,
2001 from principal shareholders of the Company.
Under terms of the agreement, the principal
shareholders were willing to make available on a
revolving basis from time to time an aggregate
principal amount not to exceed $1,000,000 at a
stated interest rate of 8%. The aggregate amount
of the Revolving Loans and interest were due on
the earlier of (a) March 31, 2002, or (b) upon the
next round of equity financing, or (c) receipt of
proceeds (net of any anticipated costs or expenses
associated therewith) from a sale of a subsidiary.
The holders of the 8% Revolving Loan have the
right to convert the principal amount and accrued
interest under the note at a conversion price of
$1.00 per share at any time before the payment in
full of such amounts due under the Loan.
F-13
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
On June 4, 2001 the principal shareholders
consummated a Subscription Agreement pursuant to
which the principal shareholders converted
$1,150,000 of the Company's 8% Convertible Notes
plus accrued interest of $46,169 into 1,196,169
shares of the Company's Common Stock at a price of
$1.00 per share.
Pursuant to a Subscription Agreement which was
consummated on June 4, 2001, the principal
shareholder purchased 250,000 shares of the
Company's Common Stock at the price of $1.00 per
share. The shares purchased were immediately
surrendered to the Company in order to allow the
Company to issue the 250,000 shares to its
President as described in Note 9.
In connection with the consummation of the
transactions contemplated by the Letter Agreement
with the new President (see Notes 8 and 9), the
Company repaid to a related party the principal
amount of $300,000 plus accrued interest on the
Revolving Note mentioned above, and the
corresponding revolving credit facility was
terminated. Upon payment in full of the revolving
loans, in accordance with the terms of the
agreement pursuant to which the loan was made, the
Company issued 300,000 5-year warrants to purchase
the Company's Common Stock at an exercise price of
$1.00 per share (see Note 12). The fair value of
the 300,000 warrants was immaterial.
Interest expense for the years ended December 31,
2001 and 2000 relating to the above notes was
approximately $63,000 and $19,000, respectively.
Certain Company office facilities are leased from
an officer of a subsidiary of the Company. Rental
expense amounted to approximately $77,300 and
$74,800 for the years ended December 31, 2001 and
2000, respectively. The lease payment is adjusted
annually based on the Consumer Price Index as of
November. The lease term is for ten years with a
renewal option of five years. The original lease
term expires on October 31, 2008.
F-14
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Amounts owed to officers and other employees of
the Company for bonus and expenses amounted to
approximately $92,300 at December 31, 2001, which
are included in accrued expenses.
Long-term notes payable in the amount of $200,000
at December 31, 2001 consisted of an 8%
Convertible Note due to principal shareholders of
the Company, which are included in due to related
parties.
6. Fair Value of Financial The carrying amounts reported in the consolidated
Instruments balance sheet for cash, accounts receivable and
accounts payable approximate fair value because of
the immediate or short-term maturity of these
financial instruments. It is not practical to
determine the fair value of the debt to related
parties.
7. Leases The Company leases all operating facilities under
operating leases expiring through October 2008.
Rent expense under operating leases was
approximately $563,000 and $608,000 for the years
ended December 31, 2001 and 2000, respectively.
The future minimum payments under noncancelable
leases for operating facilities and equipment
(capital leases) consisted of the following at
December 31, 2001:
Year ending December 31, Capital Leases Operating Leases
------------------------------------------------------------ ---------------------
2002 $16,102 $426,344
2003 16,102 431,696
2004 16,102 394,820
2005 2,683 220,737
2006 -- 88,110
Thereafter -- 168,262
------------------------------------------------------------ ---------------------
Total minimum lease payments $50,989 $1,729,969
------------------------------------------------------------ ---------------------
The operating leases also provide for cost
escalation payments and payments for maintenance
and real estate taxes. The Company has options to
renew certain leases for additional five-year
terms.
F-15
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
8. Commitments In June 2001, the Company entered into a letter
agreement with the President of the Company. The
letter agreement provides for his employment at a
base salary of $150,000 per annum (adjusted for an
increase of not less than 5% on January 1, 2002
and annually thereafter), bonuses and other
benefits.
The Company has an employment agreement expiring
in 2007 with the Publisher and Editor of DPI. The
agreement stipulates an annual salary of $144,000,
adjusted for increases in the Consumer Price
Index, plus a bonus in each fiscal year based on
net profits (as defined) of DPI, and fringe
benefits of approximately $50,000 annually.
The Publisher and Editor of DPI has a put option
that requires the Company to buy his 20 percent
interest of DPI for a price equal to 20 percent of
the retained earnings, if any, of DPI plus the
greater of $200,000 or 20 percent of gross
collected revenues (net of agency commissions) for
the full fiscal year prior to exercise of the
option. At December 31, 2001, the value of the put
option based on the aforementioned formula was
approximately $1.5 million.
In December 1999, the Company entered into an
Employment Agreement with Martin Tolchin, pursuant
to which the Company employed Mr. Tolchin to serve
as Editor-in-Chief and Publisher of Capital Hill
for a term commencing on January 1, 2000 and
ending on December 31, 2002. Mr. Tolchin is
entitled to a 2.5% phantom equity interest in
Capital Hill. Mr. Tolchin currently receives
an annual base salary of $211,000.
In July 1999, the Company entered into a five-year
employment agreement with the then CEO and
President of the Company. The agreement stipulated
a base salary of $185,000 (adjusted for increases
in the consumer price index), bonuses and other
benefits. In addition, the agreement also called
for the awarding of 250,000 shares of the
Company's common stock and options for 830,000
shares of the Company's common stock (see Note
11).
F-16
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
In December 2000, the Company terminated the
five-year employment agreement with the former CEO
and President of the Company. The separation
agreement provided for full vesting of the 250,000
shares issued pursuant to the employment
agreement, the termination of the outstanding
options, the purchase of 100,000 of the vested
shares at $2.00 per share and the purchase of the
remaining 150,000 shares at $2.00 per share on or
before May 1, 2002 (see Note 9). Compensation
expense associated with the above transaction was
approximately $312,500 (representing the excess of
the payment for the shares over the fair value of
such shares) and is included in the year ended
December 31, 2000 general and administrative
expense.
The Chairman of the Board, who is currently a
Director of the Company, has an employment
agreement with the Company through August 2003.
The agreement called for an annual salary of
$195,000 and certain other benefits. In July 1999,
the agreement was modified reducing the annual
salary to $95,000 and the Chairman received a
one-time payment of $150,000. The $150,000 is
being amortized over the remaining four years of
the agreement. Stock options for 100,000 shares of
the Company's common stock at an exercise price of
approximately $7.14 per share, which were awarded
to the Chairman in connection with his employment
agreement, were extended in 1999 to July 2004.
As of December 31, 2001, the Company had a letter
of credit with a lessor for $102,305. This was
secured by a certificate of deposit in the same
amount, which is recorded as restricted cash on
the consolidated balance sheet.
Employee Benefit Plan - The Company has a 401(k)
profit sharing plan covering all eligible
employees. Employer matching contributions are
discretionary and are determined on a yearly basis
by the Company. For the years ended December 31,
2001 and 2000, there were no matching
contributions.
F-17
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
9. Common Stock At December 31, 2001, the Company has
approximately 5,150,000 shares of common stock
reserved for issuance upon conversion of
outstanding preferred stock, exercise of options
and warrants and related party debt.
In June 2001, the Company issued an aggregate of
1,196,169 shares of common stock upon the
conversion of the $1,150,000 aggregate principal
amount of the Company's 8% Convertible Notes and
accrued interest thereon and the Company sold
250,000 shares of Common Stock at a price of $1.00
per share which were subsequently surrendered to
the Company.
Pursuant to the terms of a Subscription Agreement
which was consummated on June 4, 2001, the
President acquired 750,000 shares of NCI's common
stock at $1.00 per share, of which 500,000 shares
were purchased in June 2001 and the balance were
purchased on July 31, 2001. The Company also
issued to the President in consideration for his
investment in NCI, 250,000 additional shares of
common stock that a related party surrendered to
the Company. The President may be required to
transfer these shares back to the related party
upon the occurrence of certain events (see Note
5). As further consideration for the investment by
the President, the Company issued to the President
5-year warrants to purchase 3,000,000 shares of
common stock, of which 1,000,000 warrants have an
initial exercise price of $1.10 per share,
1,000,000 warrants have an initial exercise price
of $1.50 per share, and 1,000,000 warrants have an
initial exercise price of $2.00 per share. The
warrants are not exercisable until May 16, 2002.
Pursuant to the Letter Agreement, dated May 8,
2001, between the Company, James A.
Finkelstein and holders of a majority of the
Company's outstanding shares, these controlling
shareholders agreed, subject to certain
conditions, to vote in favor of consummating a
plan pursuant to which the Company would become
a private entity, if such plan were as described
in the Letter Agreement and if such plan were
proposed before May 15, 2002. Such transaction, if
consummated, would result in Mr. Finkelstein
owning a majority of the shares of NCI.
F-18
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
In October 2001, the holders converted 5,000
shares of $10 preferred stock into 19,106 shares
of common stock.
In December 2000, pursuant to the terms of the
contract for the sale of Brooklyn to a related
party, an officer of the purchaser surrendered
8,000 shares of common stock at a price of $1.00
per share in partial consideration of the purchase
price.
In December 2000, the Company purchased 100,000
shares of common stock at $2.00 per share from an
officer of the Company (see Note 8).
In September 2000, the Company issued a stock
dividend of 10,374 shares of common stock to
holders of the 10% nonvoting preferred stock.
In January 2000, the Company sold an aggregate of
1,548,869 shares of common stock at a common stock
price of $1.75 per share.
In January 2000, the holders converted 100 shares
of 8% preferred stock to 15,873 shares of common
stock.
In January 2000, the holders converted 200 shares
of 12% preferred stock to 31,746 shares of common
stock.
10. Preferred Stock Preferred stock consisted of the following:
December 31, 2001
-------------------------------------------------------------------------------
10% nonvoting convertible preferred stock, 1,245
shares authorized; 21 shares issued and
outstanding, $500 per share per annum cumulative
dividends, $105,000 liquidation value (a). $ 21
8% convertible preferred stock, 297 shares
authorized, 14 shares issued and outstanding, $80
per share per annum cumulative dividends, $14,000
liquidation value (b). 14
$10 convertible preferred stock, 200,000 shares
authorized, 192,500 issued and outstanding,
$1,925,500 liquidation value (c). 192,500
-------------------------------------------------------------------------------
$192,535
===============================================================================
F-19
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(a) The 10% nonvoting convertible preferred stock
is redeemable at the option of the Company,
under certain circumstances. The holders can
convert their shares of preferred stock into
shares of common stock at the rate of 600
shares of common stock for each share of
preferred stock, subject to standard
anti-dilution provisions.
During 2001 and during 2000, there were no
conversions by holders of the Company's 10%
nonvoting convertible preferred stock.
(b) The 8% convertible preferred stock and the 12%
convertible preferred stock may be redeemed,
in whole or in part, at the option of the
Company for a redemption price equal to the
liquidation preference of $1,000 per share
plus accrued and unpaid dividends. The holders
of the 8% and 12% convertible preferred stock
may convert each share, at any time, into
shares of common stock. The number of shares
of common stock into which each share of
preferred stock may be converted shall be
obtained by dividing $1,000 by a conversion
price of $6.30, which is subject to standard
anti-dilution provisions. The 8% and 12%
convertible preferred stock have no voting
rights except if the Company is in default of
four consecutive dividend payments, then
holders are entitled to vote.
F-20
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
During 2001, there were no conversions by
holders of the Company's 8% convertible
preferred stock.
In January 2000, holders of the Company's 8%
and 12% convertible preferred stock converted
100 and 200 shares, respectively, into 15,873
and 31,746 shares of common stock,
respectively. As a result, common stock at par
increased by $476, additional paid-in
capital-common stock increased by $288,015,
preferred stock at par decreased by $300, and
additional paid-in capital-preferred stock
decreased by $288,191. As a result of the
conversion of the 200 shares of 12%
convertible preferred stock, there are no
authorized, issued or outstanding 12%
convertible preferred shares at December 31,
2000. The Company issued 15,873 nonredeemable
warrants to purchase common shares at an
exercise price of $6.00 per share in
connection with the conversion of the 8%
convertible preferred stock (see Note 12).
During the years ended December 31, 2001 and
2000, cash dividends totaling $1,128 were paid
to the holders of the 8% convertible preferred
stock and the 12% convertible preferred stock.
F-21
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(c) In October 1996, the Company entered into an
agreement with a group of investors to which
the Company issued 200,000 shares of a newly
designated $10.00 convertible preferred stock
and warrants to purchase 266,667 shares of
common stock at $6.00 per share for an
aggregate consideration of $2,000,000. The
warrants to purchase 266,667 shares of common
stock expired in 2001 unexercised. In April
1998, the Company entered into an agreement
pursuant to which the Company issued 20,000
shares of $10 convertible preferred stock -
Series 2, for an aggregate consideration of
$200,000. The holders of $10 convertible
preferred stock, acting as a single class, are
entitled to nominate and elect, at all times,
one-half of the total number of directors of
the Company. In May 2001, the $10 convertible
preferred stockholders waived this right for
as long as James A. Finkelstein is serving as
President and Chief Executive Officer.
In October 2001, holders of the Company's $10
convertible preferred stock converted 5,000
shares into 19,106 shares of common stock. As
a result, common stock at par increased by
$191, additional paid-in capital common stock
increased by $49,809, preferred stock at par
decreased by $5,000 and additional paid-in
capital preferred stock decreased by $45,000.
During 2000, there was no conversion by
holders of the Company's 10% convertible
preferred stock or the $10 preferred stock.
Dividends on the $10 convertible preferred
stock are noncumulative and are payable at a
rate of five times the amount of dividends, if
any, per share declared and paid by the
Company on its common stock.
F-22
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
The holders of the $10 convertible preferred
stock may convert each share, at any time,
into shares of common stock. The number of
shares of common stock into which each share
of the $10 convertible preferred stock may be
converted is obtained by dividing $10 by a
conversion price. The conversion price was
initially set at $6.00, and is subject to
adjustments generally for dilution or decline
in the market price below $6.00. As a result
of these adjustments, the current conversion
price is $3.82.
The holders of the $10 convertible preferred
stock have substantially the same voting
rights as the holders of the Company's common
stock; however, the vote of the holders of the
$10 convertible preferred stock, acting as a
single class, is required for shareholder
approval of certain corporate matters. Each
holder of the $10 convertible preferred stock
is entitled to the number of votes that he or
she would have had if each share of $10
convertible preferred stock had been converted
into shares of common stock.
11. Stock-Based SFAS No. 123, "Accounting for Stock-Based
Compensation Compensation," establishes financial accounting
and reporting standards for employee stock-based
compensation plans and to transactions in which an
entity issues its equity instruments to acquire
goods or services from non-employees. SFAS No. 123
encourages, but does not require, companies to
record compensation cost for employee stock-based
compensation plans at fair value. The Company has
elected, as permitted by SFAS No. 123, to account
for its employee plans using the intrinsic value
based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No.
25. However, pro forma disclosures of net income
and earnings per share must be made as if the SFAS
No. 123 accounting standard had been adopted. The
fair value of options for purposes of the SFAS No.
123 pro forma disclosures has been estimated using
a Black-Scholes option pricing model.
F-23
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
In July 1999, the Company entered into a stock
option agreement with the former President and CEO
of the Company. The Company granted options to
purchase 830,000 shares of common stock at an
exercise price of $1.8125 per share. The options
vest in four equal installments of 207,500 shares
commencing July 2000. In December 2000, the option
agreement was terminated (see Note 8).
In July 1999, the Company entered into a stock
option agreement with two directors for five year
options to purchase an aggregate of 350,000 shares
of common stock at an exercise price of $2.25 per
share. The options are immediately exercisable.
In August 1999, the Company entered into a stock
option agreement with an officer for options to
purchase 100,000 shares of common stock at an
exercise price of $1.625 per share. The options
vest in four equal installments of 25,000 shares,
commencing in August 2000. In May 2001, the option
agreement was terminated.
Information regarding the Company's stock option
plans is as follows:
(a) Stock Option Plan - The Company has a Stock
Option Plan (the "Plan") pursuant to which it
has reserved authorized, but unissued, shares
of common stock for issuance of both qualified
incentive stock options and non-qualified
stock options to employees, officers and
directors of the Company. Under the Plan, a
maximum of 122,222 shares of common stock is
available for issuance. The option price will
be the fair market value (110% of the fair
market value for qualified incentive stock
options granted to a holder of 10% or more of
the Company's common stock) as defined by the
Plan. Generally, options may be exercised
commencing two years from the date of grant
and terminating ten years from the date of
grant. The following is a summary of
transactions:
F-24
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Year ended December 31, 2001 2000
-------------------------- ---------------------------------------
Outstanding, beginning
of period 25,833 39,999
Granted during the period - -
Terminated during the
period (12,500) (14,166)
------------------------------------------------------------------
Outstanding, end of
period(1) 13,333 25,833
==================================================================
--------------
(1) With an exercise price per share ranging
from $6.00 to $7.88, after giving effect
to the one-for-ten reverse stock split,
which occurred on May 12, 1992, and the
one-for-three reverse stock split which
occurred on January 19, 1999. The weighted
average exercise price per share at
December 31, 2001 and 2000 was $7.10 and
$7.25, respectively.
At December 31, 2001 and 2000 there were
108,889 and 96,389 shares (after giving effect
to the December 15, 1995 amendment to the
stock option plan to increase the number of
shares of common stock available for issuance
pursuant to the Plan) available for future
grants, respectively.
(b) Directors and Officers Stock Option Plan - On
August 17, 1993, the Board of Directors
adopted a Discretionary Directors and Officers
Stock Option Plan as amended (the
"Discretionary Option Plan") pursuant to which
the Board may award options to purchase an
aggregate of 500,000 shares of common stock to
directors and officers of the Company and its
subsidiaries which shall be exercisable at the
market price on the date of grant for periods
(generally five years) and, under certain
conditions, a time period specified by the
Board in such grants. Options under the
Discretionary Option Plan are nonqualified and
nonincentive options for purposes of income
taxation and are not intended to qualify under
Section 422A of the Internal Revenue Code of
1986. No grants were made under the
Discretionary Option Plan during the fiscal
years ended December 31, 2001 and 2000.
F-25
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
On August 17, 1993, the Board also adopted a
Non-Discretionary Directors Stock Option Plan
(the "Non-Discretionary Option Plan") pursuant
to which each director will be granted, on
August 17, 1993 and each anniversary thereof
on which he or she continues to be a director,
a five-year option to purchase 3,333 shares of
common stock at the market price on the date
of the grant. Under this plan, a maximum of
166,667 shares of common stock is available
for issuance. The Non-Discretionary Option
Plan also provides that any person becoming a
director within the six months after any
August 17 will be granted options. On August
17, 2001, options to purchase 26,664 shares of
common stock were granted at an exercise price
of $1.00 per share.
The following is a summary of transactions
relating to the Directors and Officers' Stock
Option Plans:
Year ended December 31, 2001 2000
---------------------------------------------------------------
Outstanding, beginning 358,328 371,664
of year
Cancelled/expired during
the year (115,000) (43,333)
Granted during the year 26,664 29,997
---------------------------------------------------------------
Outstanding, end of year
(1) 269,992 358,328
===============================================================
--------------
(1) With an exercise price per share ranging
from $1.00 to $7.88. The weighted average
exercise price at December 31, 2001 and
2000 was $4.97 and $5.51, per share,
respectively.
F-26
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(c) 1999 Stock Option Plan - The Company has a
stock option plan (the "1999 Plan") pursuant
to which it has reserved authorized, but
unissued, shares of common stock for issuance
of both qualified incentive stock options and
nonqualified stock options to employees,
officers and directors of the Company and
other individuals providing services to or for
the Company. Under the Plan, a maximum of
200,000 shares of common stock is available
for issuance. The option price will be the
fair market value as defined by the Plan.
Generally, options may be exercised commencing
two years from the date of grant and
terminating ten years from the date of grant.
In June 2000, the Company entered into stock
option agreements with certain employees for
options to purchase 136,000 shares of common
stock at an exercise price of $1.188 per
share. The options vest in June 2002.
In November 2000, the Company entered into a
stock option agreement with a consultant for
options to purchase 18,000 shares of common
stock at an exercise price of $1.00 per share.
The options vested immediately.
The following is a summary of transactions:
Year ended December 31, 2001 2000
----------------------------------------------------------------
Outstanding, beginning 131,500 -
of period
Granted during the period - 154,000
Terminated during the
period (57,500) (22,500)
----------------------------------------------------------------
Outstanding, end of
period (1) 126,000 131,500
================================================================
--------------
(1) With an exercise price per share ranging
from $1.00 to $1.188. The weighted average
exercise price at December 31, 2001 and
was $1.142 and $1.162, respectively.
F-27
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
For purposes of pro forma disclosure, the
estimated fair value of the options and warrants
(see Note 12) are amortized to expense over the
vesting period of the options and warrants. The
fair value of these options and warrants was
estimated at the date of grant using a
Black-Scholes options pricing model with the
following weighted average assumptions for 2001
and 2000, respectively: risk-free interest rates
from 4.49% to 4.93% and 6.06% and 6.88%;
volatility factor of the expected market price of
the Company's common stock of 70.0% and 63.9%; and
weighted average expected lives of 5 and 8.3
years. The Company's pro forma information
relative to the Company's option and warrant plans
are as follows:
Year ended Year ended
December 31, December 31,
2001 2000
--------------------------------------------------------------------------------
Pro forma net loss:
Net loss as reported $(2,797,062) $(1,594,600)
Additional compensation expense under
SFAS No. 123 (287,332) (127,867)
--------------------------------------------------------------------------------
$(3,084,394) $(1,722,467)
Loss per share - Basic and Diluted
As reported $(0.29) $(0.19)
Pro forma $(0.32) $(0.21)
================================================================================
12. Stock Warrants At December 31, 2001, the Company has 3,432,222
shares of stock reserved for issuance upon
exercise of warrants. Information regarding the
Company's warrants outstanding is as follows:
Non-Redeemable Warrants - At December 31, 2001 and
2000, the Company had outstanding 3,432,222 and
598,889 nonredeemable warrants, respectively. Each
warrant entitles the holder to purchase one share
of the Company's common stock at an exercise price
ranging from $1.00 to $6.75 per share. The
warrants are exercisable and expire on the
following dates:
F-28
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Number of warrants Exercise date Expiration date
-----------------------------------------------------------------------------------
7,936 January 11, 1997 January 11, 2002
8,413 June 1, 1997 June 1, 2002
100,000 November 11, 1997 November 12, 2002
15,873 January 11, 2000 January 11, 2005
300,000 June 4, 2001 June 4, 2006
3,000,000 May 16, 2002 April 19, 2006
===================================================================================
In June 2001, pursuant to a letter agreement with
the President of the Company, the Company issued
to the President as additional consideration for
his common stock investment, 5-year warrants to
purchase 3,000,000 shares of common stock (see
Note 9).
In June 2001, the Company issued 300,000 5-year
warrants to purchase the Company's Common Stock at
an exercise price of $1.00 per share (See Note 5).
There were no exercises of non-redeemable warrants
during the years ended December 31, 2001 and 2000.
Warrants that expired in May 2001 were issued to a
principal shareholder of the Company, of which
66,667 were issued in connection with a promissory
note and 133,333 were issued as consideration for
consulting services. A total of 266,667 warrants
that expired in October 2001 were issued with the
$10 convertible preferred stock (see Note 10). All
of the warrants that expire November 2002 were
issued to an affiliate of the principal
shareholder of the Company in connection with a
promissory note. All of the warrants which expire
January 2002, June 2002 and January 2005, were
issued in connection with the conversion of 8%
preferred stock to common stock (see Note 10).
F-29
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
13. Income Taxes The Company has a deferred tax asset amounting to
approximately $8.3 million at December 31, 2001,
principally relating to net operating loss
carryforwards and a basis difference in the
carrying amount of trade accounts receivable for
financial reporting purposes and the amount used
for income tax purposes. The Company recorded a
valuation allowance amounting to the entire
deferred tax asset balance due to the Company's
financial condition, its lack of a history of
consistent earnings, and possible limitations on
the use of carryforwards giving rise to
uncertainty as to whether the deferred tax asset
is realizable. No amount of current or deferred
federal or state income tax is presented.
As of December 31, 2001, the Company had net
operating loss income tax carryforwards of
approximately $15.4 million, which expire in the
years 2007 through 2020.
The Company recorded a provision of approximately
$163,000 for state and local income taxes for the
year ended December 31, 2001.
F-30
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
14. Recent Accounting In June 2001, the Financial Accounting Standards
Standards Board finalized FASB Statements No. 141, Business
Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141
requires the use of the purchase method of
accounting and prohibits the use of the
pooling-of-interests method of accounting for
business combinations initiated after June 30,
2001. SFAS 141 also requires that the Company
recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for
purchase business combinations completed on or
after July 1, 2001. It also requires, upon
adoption of SFAS 142, that the Company reclassify
the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead
test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company
identify reporting units for the purposes of
assessing potential future impairments of
goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease
amortization of intangible assets with an
indefinite useful life. An intangible asset with
an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS
142. SFAS 142 is required to be applied in fiscal
years beginning after December 15, 2001 to all
goodwill and other intangible assets recognized at
that date, regardless of when those assets were
initially recognized. SFAS 142 requires the
Company to complete a transitional goodwill
impairment test six months from the date of
adoption. The Company is also required to reassess
the useful lives of other intangible assets within
the first interim quarter after adoption of SFAS
142.
F-31
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
The Company's previous business combinations were
accounted for using the purchase method. As of
December 31, 2001, the net carrying amount of
goodwill is $262,682 and other intangible assets
is $525,469. Amortization expense relating to the
above goodwill during the year ended December 31,
2001 was approximately $36,000. The Company
intends to complete the transitional goodwill
impairment test within six months from the date of
adoption. The impact of the adoption of SFAS 141
and SFAS 142 on the Company's financial position
and results of operations is not expected to be
material.
In August 2001, the Financial Accounting Standards
Board issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets,"
which addresses financial accounting and reporting
for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121 and the
accounting and reporting provisions of APB Opinion
No. 30 for a disposal of a segment of a business.
SFAS 144 is effective for fiscal years beginning
after December 15, 2001, with earlier application
encouraged. The Company will adopt SFAS 144 as of
January 1, 2002, and it does not expect that the
adoption of the Statement will have a significant
impact on the Company's financial position and
results of operations.
F-32
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
15. Sale of Subsidiaries On April 30, 2001, NCI completed the sale of
substantially all of the assets and liabilities of
the Nassau Community Newspaper Group, Inc. and
South Shore Publishers, Inc. ("Nassau") to NCN
Acquisition LLC for $450,000, resulting in a net
loss of approximately $525,000. As part of the
proceeds, NCN Acquisition LLC issued NCI a note in
the aggregate principal amount of $175,000 with
interest of 6.25% per annum. Accrued and unpaid
interest is payable on each of the first and
second anniversary dates. The outstanding balance
of $175,000 plus accrued and unpaid interest is
payable on the third anniversary date. The note is
secured by all of the assets of NCN Acquisition
LLC.
On August 3, 2001, NCI completed the sale of
Manhattan Newspaper Group ("Manhattan") to
Manhattan Media Corp. for $910,000 resulting in a
net loss of approximately $375,000. As part of the
proceeds, Manhattan Media Corp issued to NCI a
note in the principal amount of $550,000 with
interest of 5% per annum. A principal payment of
$50,000 plus accrued interest on the outstanding
balance is payable on each of the first and second
anniversary dates. The current principal payment
due is included in other current assets on the
consolidated balance sheet. The remaining
principal balance of the note together with all
other amounts including accrued interest is
payable by Manhattan Media Corp. to the Company on
August 3, 2004. The note is secured by all of the
assets of the companies comprising the Manhattan
Newspaper Group and a pledge of the shares of the
stock of each of the companies comprising the
Manhattan Newspaper Group.
Revenues for Nassau and Manhattan for the year
ended December 31, 2001 aggregated approximately
$2,209,000.
On June 15, 2000, the Company completed the sale
of substantially all of the assets and liabilities
of the Parkchester Publishing Co., Inc. ("Bronx
Press Review") to Metro North Media, Inc., for
$326,000 resulting in a net gain on the sale of
$39,478. As part of the proceeds, the Company
received a non-interest bearing note receivable of
$126,000 due in equal installments over the next
three years. This note is secured by certain
assets and revenue streams of Metro North Media,
Inc.
F-33
News Communications, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
On December 12, 2000, the Company completed the
sale of Brooklyn Newspaper Publishing, Inc.
("Brooklyn") to Metro Multi Media Corp. for
$240,000, resulting in a net loss of $43,976.
Revenues for the Bronx Press Review and Brooklyn
for the years ended December 31, 2000 aggregated
approximately $1,573,000.
F-34