UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 2003
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-18299
NEWS COMMUNICATIONS, INC.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
Nevada 13-3346991
------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2 Park Avenue, Suite 1405
New York, New York 10016
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$0.01 par value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Registrant's telephone number, including area code: (212) 689-2500
The number of shares of common stock outstanding as of August 6, 2003 was
10,589,410.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet
at June 30, 2003...................................................................3
Unaudited Consolidated Statements of
Operations for the three months and six months ended
June 30, 2003 and 2002.............................................................4
Unaudited Consolidated Statements of Cash
Flows for the six months ended
June 30, 2003 and 2002.............................................................5
Notes to Consolidated Financial Statements.........................................6
Item 2. Management's Discussion and Analysis
or Plan of Operation...............................................................9
Item 3. Controls and Procedures...........................................................16
PART II. Other Information
Item 5. Other Information.................................................................18
Item 6. Exhibits and Reports on Form 8-K..................................................18
Signatures.....................................................................................19
Certifications.................................................................................20
31.1 Chief Executive Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
2
PART I
Financial Information
ITEM 1 - Financial Statements
News Communications, Inc. and Subsidiaries
Consolidated Balance Sheet as of June 30, 2003
Unaudited
Assets
Current:
Cash $ 538,496
Accounts receivable - net of allowance for doubtful accounts of $342,656 1,157,368
Notes Receivable 368,823
Other 170,411
------------
Total current assets 2,235,098
Restricted Cash 34,102
Notes Receivable, net of current portion 701,667
Property and equipment at cost- net 393,409
Goodwill 314,809
Trade names, net 501,706
Other - net 15,580
------------
$ 4,196,371
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 990,528
Accrued expenses 1,191,942
Note payable, current portion 4,445
Income taxes payable 12,491
Unearned revenue 78,849
Due to related parties 751,587
Capital lease, current portion 23,618
------------
Total current liabilities 3,053,460
Due to related parties 837,106
Note payable, net of current portion 14,076
Capital lease, net of current portion 37,575
------------
Total liabilities 3,942,217
------------
Stockholders' equity:
Preferred stock, $1.00 par value; 500,000 shares authorized: 192,529 shares
issued and outstanding: $2,039,500 aggregate liquidation value 192,529
Common stock, $.01 par value; authorized 100,000,000 shares; 11,247,744 shares
issued and 10,589,410 outstanding 112,477
Paid-in-capital preferred stock 1,703,320
Paid-in-capital common stock 25,946,672
Deficit (26,799,115)
------------
1,155,883
Less: Treasury stock, (658,334 common shares) - at cost (901,729)
------------
Total stockholders' equity 254,154
------------
$ 4,196,371
============
See accompanying notes to unaudited financial statements.
3
News Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
Unaudited
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net revenues $ 3,225,430 $ 3,640,194 $ 4,796,492 $ 6,129,302
------------- ------------- ------------- -------------
Expenses:
Editorial 557,812 292,402 884,796 568,278
Production and distribution 823,535 977,692 1,219,988 1,663,847
Selling 845,312 727,406 1,365,945 1,371,225
General and administrative 920,388 1,254,931 1,739,910 2,507,722
Depreciation and amortization 46,908 61,026 93,033 121,750
----------- ----------- ----------- -----------
Total expenses 3,193,955 3,313,457 5,303,672 6,232,822
----------- ----------- ----------- -----------
Income (loss) from operations, before interest,
minority interest in income of subsidairy and
provision for income taxes 31,475 326,737 (507,180) (103,520)
Interest income (expense), net (10,162) 4,080 (17,514) 8,773
Minority interest in income of subsidiary -- (36,000) -- (81,000)
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes 21,313 294,817 (524,694) (175,747)
Provision for income taxes 32,926 41,500 34,926 69,000
----------- ----------- ----------- -----------
Net income (loss) $ (11,613) $ 253,317 $ (559,620) $ (244,747)
=========== =========== =========== ===========
Income (loss) per common share:
Basic and diluted $ (0.00) $ 0.02 $ (0.05) $ (0.02)
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Basic and diluted 10,358,641 10,686,114 10,280,581 10,685,963
=========== =========== =========== ===========
See accompanying notes to unaudited financial statements.
4
News Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited
Six months ended June 30, 2003 2002
--------- ---------
Cash flows from operating activities
Net Loss $(559,620) $(244,747)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 93,033 121,750
Provision for doubtful accounts (7,000) 222,600
Minority interest -- 81,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (678,631) (286,394)
Other current assets 10,703 (49,559)
Restricted cash -- (1,295)
Other assets 2,730 41,335
Increase (decrease) in:
Accounts payable and accrued expenses 805,883 355,916
Income taxes payable 12,491 --
Other liabilities -- 21,358
Related party payable 41,019 7,934
--------- ---------
Net cash provided by (used in) operating activities (279,392) 269,898
--------- ---------
Cash flows from investing activities:
Capital expenditures (29,237) (27,554)
--------- ---------
Net cash used in investing activities (29,237) (27,554)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants 400,000 --
Payment of related party notes payable (112,461) --
Dividends on preferred stock (564) (564)
Payment of capital lease obligations (9,933) (9,393)
Payments on automobile loan (2,593) --
Payment of other current liabilities -- (175,000)
Collection of note receivable 20,200 16,300
--------- ---------
Net cash provided by (used in) financing activities 294,649 (168,657)
--------- ---------
Net increase (decrease) in cash (13,980) 73,687
Cash, beginning of year 552,476 596,505
--------- ---------
Cash, end of period $ 538,496 $ 670,192
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 8,931 $ 2,420
Cash paid during the period for income taxes 18,919 66,841
Non-cash activities:
Purchases of equipment under capital leases 26,930 --
Conversion of preferred stock into common stock 30 --
========= =========
See accompanying notes to unaudited financial statements.
5
NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation:
In the opinion of News Communications, Inc.'s ("NCI" or "the Company")
management, the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information set forth therein. These consolidated financial
statements are condensed and, therefore, do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The results for the interim periods are not necessarily
indicative of the results for a full year.
The Company is growing the operations of its core publications, Dan's Papers,
Dan's Hampton Style (also called Dan's Magazine Hampton Style), Montauk Pioneer
and The Hill. The Company intends to finance these new business initiatives and
its existing liabilities from working capital, from additional sales of equity
securities, from the installment payments due to the Company from the sale of
subsidiaries or by a sale of assets. A total of $400,000 has been received in
2003 from the sale of the Company's common stock. The Company believes that
additional investments to fund the Company's obligations will be received during
the course of 2003. Regardless of whether additional funds are received, the
Company believes that it will have sufficient working capital to fund its
operations through December 31, 2003. During 2004, however, in addition to its
ordinary course obligations, the Company will have to satisfy its $600,000
obligation, plus interest, due to the former minority owner of Dan's Papers Inc.
and pay $112,461, plus interest, to the former publisher of The Hill. These are
reported in the balance sheet as current obligations due to related parties. In
order to meet these obligations and to finance the full expansion of both its
core and new operations, the Company has determined that approximately
$1,400,000 in funds needs to be raised during the next year. In the event that
the Company is not able to secure additional equity or debt investments, the
Company may sell assets in order to meet its obligations.
These consolidated financial statements should be read in conjunction with NCI's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002 and the
related audited financial statements included therein.
B. Income (Loss) per Share:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which
provides for the calculation of "basic" and "diluted" earnings per share. Basic
earnings per share include no dilution and is computed by dividing income
available to common shareholders by the weighted average number of shares of
common stock outstanding for the period. Diluted earnings per share reflect, in
periods in which they have a dilutive effect, the effect of shares of common
stock issuable upon exercise of common stock equivalents. The assumed conversion
of the options and warrants would have been anti-dilutive and, therefore, were
not considered in the computation of diluted earnings per share for the three
and six months ended June 30, 2003 and 2002.
For the six months ended June 30, 2003, options to purchase 744,823 shares of
common stock, warrants to purchase 3,315,873 shares of common stock, convertible
preferred shares convertible into 749,045 shares of common stock, and
convertible notes convertible into 237,107 shares of common stock were not
included in the computation of diluted earnings per share as the exercise prices
of the options and warrants were greater than the average market price of the
common
6
shares. These options and warrants, which, expire from July 27, 2004 through
November 28, 2015, were all outstanding at June 30, 2003.
C. Recently Issued Accounting Standards:
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a company recognize
a liability for a cost associated with an exit or disposal activity only when it
meets the definition of liability (i.e., when the liability is incurred). SFAS
146 also requires that the initial measurement of the liability be at its fair
value. This statement is effective on a prospective basis for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The adoption of SFAS 146 did not have a material impact on the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensations - Transition and Disclosure, an amendment of SFAS No. 23,
Accounting for Stock-Based Compensations, which provides alternatives for
companies electing to account for stock-based compensation using the fair value
criteria established by SFAS No. 123. The Company intends to continue to account
for stock-based compensation under the provisions of Accounting Principles Board
Opinion No. 25.
On May 1, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003. The Company's adoption of SFAS 149 should not have an
effect on its consolidated financial statements.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150").
SFAS 150 changes the accounting for certain financial instruments that, under
previous guidance, could be classified as equity or "mezzanine" equity, by now
requiring those instruments to be classified as liabilities (or assets in some
circumstances) in the statement of financial position. Further, SFAS 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS 150 affects an entity's classification of the following
freestanding instruments; mandatory redeemable instruments, financial
instruments to repurchase an entity's own equity instruments and financial
instruments embodying obligations that the issuer must or could choose to settle
by issuing a variable number of its shares or other equity instruments based
solely on (a) a fixed monetary amount known at inception or (b) something other
than changes in its own equity instruments. SFAS 150 is effective for periods
beginning after June 15, 2003. The Company's adoption of this interpretation is
not expected to have an effect on its consolidated financial statements.
D. Accounting for Stock-Based Compensation:
The Company has several stock-based employee compensation plans in effect that
were entered into in 1987, 1993, and 1999. The Company accounts for all
transactions under which employees receive shares of stock or other equity
instruments in the Company based on the price
7
of its stock in accordance with the provisions of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees." No stock-based
employee compensation cost is reflected in net loss, as all options granted
under the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. There were no options granted and no options
were vested during the three and six months ended June 30, 2003. In accordance
with SFAS No. 148, the following table illustrates the effect on net loss and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 "Accounting for Stock-Based Compensation".
Three months ended Six Months Ended
----------------------------- -----------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net income (loss), as reported $(11,613) $253,317 $(559,620) $(244,747)
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards -- (96,475) -- (110,737)
-------- -------- --------- ---------
Proforma net loss $(11,613) $156,842 $(559,620) $(355,484)
======== ======== ========= =========
Basic and diluted net income (loss) per share:
As reported (0.00) 0.02 (0.05) (0.02)
-------- -------- --------- ---------
Proforma (0.00) 0.01 (0.05) (0.03)
-------- -------- --------- ---------
E. Common Stock:
On January 17, 2003, a shareholder converted 5 shares of 10% convertible
preferred stock into 3,000 shares of common stock.
On March 17, 2003, pursuant to a Subscription Agreement, the President of the
Company, James A. Finkelstein, acquired 50,000 shares of the Company's common
stock at a purchase price of $1.00 per share.
On March 24, 2003, pursuant to a Subscription Agreement, the Company sold 50,000
shares of common stock at a purchase price of $1.00 per share to a related
party.
On May 1, 2003, pursuant to a Subscription Agreement, the Company sold 50,000
shares of common stock at a purchase price of $1.00 per share.
On June 19, 2003, pursuant to a Subscription Agreement, the Company sold 250,000
shares of common stock at a purchase price of $1.00 per share.
8
NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in this Item 2, Management's Discussion and Analysis
or Plan of Operation, contains "forward looking statements" within the meaning
of Section 27A of the Securities Act 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results may materially
differ from those projected in the forward-looking statements as a result of
certain risks and uncertainties set forth in this report. Although management
believes that the assumptions made and expectations reflected in the forward
looking statements are reasonable, there is no assurance that the underlying
assumptions will, in fact, prove to be correct or that actual future results
will not be different from the expectations expressed in this report.
News Communications, Inc. is an established publisher of various
advertiser-supported newspapers and magazines. As of June 30, 2003, we published
3 newspapers (The Hill, Dan's Papers, and Montauk Pioneer) and expanded our
publications with a new magazine in the Hamptons in, New York, Dan's Hampton
Style (also called Dan's Magazine Hampton Style). A new publication was produced
in July 2003, GSN: Government Security News. While Dan's Hampton Style has
exceeded expectations, it is most likely that GSN will be sold or closed because
revenue goals were not achieved.
NCI Critical Accounting Policies
The following discussion and analysis of the financial condition and operating
results are based upon the consolidated financial statements of the Company,
which have been prepared in accordance with generally accepted accounting
principles. GAAP refers to accounting principles generally accepted in the
United States of America. Throughout this Management Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A"), management discusses
financial measures in accordance with GAAP and also on a non-GAAP basis. The
Company's definition of EBITDA is earnings before interest, income taxes,
depreciation and amortization. EBITDA does not include gains or losses from the
sale of subsidiaries. All references in this MD&A to EBITDA are to a non-GAAP
financial measure. EBITDA, a measure widely used among media related businesses,
is used in this report because management believes that it is an effective way
of monitoring the operating performance of our company relative to the industry.
Additionally, the Company believes that the use of non-GAAP financial measures
enables it and investors to evaluate, and compare from period to period, the
results from ongoing operations in a more meaningful and consistent manner. A
reconciliation of GAAP to non-GAAP financial measures is included on pages 12
and 15.
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 81% of revenues from
operations are from display advertising sales and 15% are from classified
advertising sales. Unearned revenues of approximately $78,800 at June 30, 2003
represent future classified advertisement for which customers have paid in
advance and for subscription revenue for future issues.
Allowance for Uncollectible Accounts Receivable. We record an allowance for
doubtful accounts based on specifically identified amounts that we believe to be
uncollectible. We also record additional allowance based on certain percentages
of our aged receivables, which are determined based on historical experience and
our assessment of the general financial conditions
9
affecting our customer base. If our actual collections experience changes,
revisions to our allowance may be required. We do not have customers with
individually large amounts due at any given balance sheet date. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance. Our accounts receivable balance was approximately
$1,157,000, net of allowance for doubtful accounts of approximately $343,000 at
June 30, 2003.
Long-Lived Assets. Long-lived assets such as trade names 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.
Trade names and property and equipment are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. No impairment losses have been necessary through June
30, 2003.
Income Taxes. We have a history of operating losses. These losses generated a
sizeable federal tax net operating loss, or NOL carryforwards, of approximately
$17.3 million as of June 30, 2003. 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 taxes) for current income. It is possible that the Company could become
profitable and that a portion or all of the NOL carryforwards 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.
Accounting for Stock-Based Compensation. The Company has several stock-based
employee compensation plans in effect that were entered into in 1987, 1993, and
1999. The Company accounts for all transactions under which employees receive
shares of stock or other equity instruments in the Company based on the price of
its stock in accordance with the provisions of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees." No stock-based
employee compensation cost is reflected in net loss, as all options granted
under the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. There were no options granted and no options
were vested during the three and six months ended June 30, 2003 and 2002. In
accordance with SFAS No. 148, the following table illustrates the effect on net
loss and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation".
10
Three months ended Six Months Ended
----------------------------- -----------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net income (loss), as reported $(11,613) $253,317 $(559,620) $(244,747)
Less: Total stock-based employee
compensation expense determined
under fair value based method for all awards -- (96,475) -- (110,737)
-------- -------- --------- ---------
Proforma net loss $(11,613) $156,842 $(559,620) $(355,484)
======== ======== ========= =========
Basic and diluted net income (loss) per share:
As reported (0.00) 0.02 (0.05) (0.02)
-------- -------- --------- ---------
Proforma (0.00) 0.01 (0.05) (0.03)
-------- -------- --------- ---------
Results of Operations:
Three Months Ended June 30, 2003 Compared With Three Months Ended June 30, 2002
Revenues
Revenues from businesses excluding those from a sold business (Queens Tribune
and related publications that were sold in November 2002) increased $414,624 or
14.8% in the second quarter of 2003 compared to the second quarter of 2002.
Overall revenues for the second quarter including the sold business decreased
$414,724 or 11.4% to $3,225,430 compared with $3,640,194 in the second quarter
of 2002. Variances in specific revenue categories for the three month period
excluding the sold business were as follows: display advertising, which
represented 85% of total revenues in the quarter, increased 15% to $2,728,235 in
the second quarter 2003 compared with $2,367,996 in the second quarter of 2002
and classified advertising increased 8% to $418,836 compared to $388,142 in
2002. Other revenue, primarily subscription revenue, increased $23,691 to
$78,360 in 2003 compared with $54,669 in 2002.
Among our individual operating units, display advertising was strong at Dan's
Papers Inc. increasing 16%. This was largely attributed to the recent
introduction of Dan's Hampton Style in May of 2003. Classified advertising at
Dan's Papers continued to grow in the second quarter by 5%. Revenues for The
Hill increased 18% with the introduction of a second edition on Tuesdays.
Operating Expenses
Operating expenses for the second quarter of 2003 were $3,193,955, a decrease of
4%, compared with operating expenses of $3,313,457 during the second quarter of
2002. Excluding expenses from a sold business (Queens Tribune and related
publications that were sold in November 2002) operating expenses increased 27%
to $3,193,955 in the second quarter of 2003 compared with $2,507,099 for the
second quarter of 2002. This is largely attributed to the operating costs
associated with the expansion of The Hill with a second edition which started in
March 2003, the introduction in May 2003 of Dan's Hampton Style, and the
operating costs for development of GSN: Government Security News in the current
quarter.
Variances in specific expense categories, excluding the sold business and
excluding the operating expenses for GSN, were as follows: editorial,
production, and distribution were 48% higher compared to the three months ended
June 30, 2002. This is primarily due to the costs associated
11
with the introduction in March 2003 of a second edition of The Hill and the
introduction in May of Dan's Hampton Style. Selling expenses were 30% higher for
the three months ended June 30, 2003 compared to the same quarter in 2002
primarily due to higher sales commissions on the revenue gains in the quarter
and to the establishment of a New York sales office. Expenditures for market
research and promotional materials for new business initiatives increased in the
second quarter of 2003. General and administrative expenses decreased 10% for
the three months ended June 30, 2003 compared to the three months ended June 30,
2002.
Provision for Income Taxes
The Company recorded provisions for state and local income taxes of $32,926 and
$41,500, respectively, for the three months ended June 30, 2003 and 2002.
Income
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
three months ended June 30, 2003, declined by $273,380 from $351,763 in the
second quarter of 2002 to $78,383 in the second quarter of 2003. Revenue gains
generated by the expansion of Dan's Hampton Style and The Hill were largely
offset by the increase in the corresponding editorial, production, distribution,
and selling expenses and by the costs associated with GSN, the new publication
previously discussed. General and administrative costs were lower for the three
months ended June 30, 2003.
Reconcilations of GAAP to Non-GAAP Financial Measures. Reconciliations of GAAP
to non-GAAP financial measures are provided below. As previously explained,
EBITDA is a measure widely used among media related businesses and is used in
this report because management believes that it is an effective way of
monitoring the operating performance of our company relative to the industry.
EBITDA does not include capital gains or losses from the sale of subsidiaries.
Three months ended June 30, 2003 2002
------- --------
Earnings before interest, taxes, depreciation,
and amortization (EBITDA)
Income from operations $31,475 $326,737
Depreciation and amortization 46,908 61,026
Minority interest in income of subsidiary -- (36,000)
------- --------
EBITDA $78,383 $351,763
======= ========
EBITDA, excluding the operating expenses of GSN in the second quarter of 2003
and the profit of the sold business for the second quarter of 2002 but including
the expansion costs at both Dan's Papers Inc. and The Hill, declined $51,735 to
$271,686 compared to $323,421 for the same period in 2002. The expansion at
Dan's and The Hill resulted in an increase in editorial and manufacturing and
distribution costs of $441,765 and an increase in selling expenses of $166,446
that were partially offset by an increase in revenue of $414,624. Additionally,
the costs were further offset by a decrease in minority interest of $36,000 and
a decrease in general and administrative costs of $105,852.
12
Three months ended June 30, 2003 2002
-------- --------
EBITDA $ 78,383 $351,763
GSN operating expenses 193,303 --
EBITDA from sold business (28,342)
-------- --------
EBITDA, excluding GSN & sold business $271,686 $323,421
======== ========
The Company generated a net loss of $11,613 in the second quarter of 2003
compared with a net profit of $253,317 for the second quarter of 2002. Excluding
the net loss of the business sold in 2002, the loss increased by $241,901 in the
second quarter of 2003 compared with the second quarter of 2002. This was
attributed to an increase in editorial, production, and distribution costs of
$441,765, an increase in selling expenses of $166,446, and to the operating
expenses of $193,303 for GSN. These costs were partially offset by an increase
in revenues of $414,624, a decrease in general and administrative expenses of
$105,852, a decrease in depreciation and amortization of $8,802, a decrease in
minority interest of $36,000, and a decrease in the tax provision of $8,574. Net
interest expense increased $14,239 in the second quarter of 2002.
On a per share basis, the net loss was $0.00 for the second quarter of 2003
compared with net income per share of $0.02 for the second quarter of 2002.
Six Months Ended June 30, 2003 Compared With Six Months Ended June 30, 2002
Revenues
Revenues from businesses excluding those from a sold business (Queens Tribune
and related publications that were sold in November 2002) increased $262,911 or
5.8% in the first six months of 2003 compared to the first six months of 2002.
Overall revenues for the first six including the sold business decreased
$1,332,810 or 21.7% to $4,796,492 compared with $6,129,302 in the first six
months of 2002. Variances in specific revenue categories for the first six
months of 2003 excluding the sold business were as follows: display advertising,
which represented 81% of total revenues in the first six months, increased 3% to
$3,886,800 in the first six months of 2003 compared with $3,786,101 in the first
six months of 2002 and classified advertising increased 11% to $726,017 compared
to $655,820 in 2002. Other revenue, primarily subscription revenue, increased
$92,015 to $183,675 in 2003 compared with $91,660 in 2002.
Among our individual operating units, display advertising was strong at Dan's
Papers Inc. increasing 9% and was largely attributed to the introduction of
Dan's Hampton Style as previously explained. Classified advertising at Dan's
Papers continued to grow in the first six months by 10%. Revenues for The Hill
for the first six months were essentially flat and benefited by the revenue
gains in the second quarter largely due to the introduction of a second edition
on Tuesdays of The Hill.
Operating Expenses
Operating expenses during the first six months of 2003 were $5,303,672, a
decrease of 15%, compared with operating expenses of $6,232,822 during the first
six months of 2002. Excluding expenses from a sold business (Queens Tribune and
related publications that were sold in November 2002), operating expenses
increased 15% to $5,303,672 in the first six months of 2003 compared with
$4,614,885 for the first six months of 2002. This is largely attributed to the
operating costs associated with the expansion of The Hill with a second edition
starting in
13
March, the introduction in May of Dan's Hampton Style, and the operating costs
for development of GSN: Government Security News.
Variances in specific expense categories, excluding the sold business and
excluding the expenses for GSN, were as follows: editorial, production, and
distribution were 35% higher compared to the six months ended June 30, 2002.
This is primarily due to the costs associated with the introduction in March
2003 of a second edition of The Hill and the introduction in May 2003 of Dan's
Hampton Style. Selling expenses were 25% higher for the six months ended June
30, 2003 compared to the period in 2002 primarily due to higher sales
commissions on the revenue gains in the second quarter and to the
establishment of a New York sales office. Expenditures for market research and
promotional materials for new business initiatives increased in the first six
months of 2003. General and administrative expenses decreased 14% for the six
months ended June 30, 2003 compared to the six months ended June 30, 2002.
Provision for Income Taxes
The Company recorded provisions for state and local income taxes of $34,926 and
$69,000, respectively, for the six months ended June 30, 2003 and 2002.
Income
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
six months ended June 30, 2003, declined by $351,377 from a loss of $62,770 in
the first six months of 2002 to a loss of $414,147 in the first six months of
2003. Revenue gains generated by the expansion of Dan's Hampton Style and The
Hill were largely offset by the increase in the corresponding editorial,
production, distribution, and selling expenses and to the operating costs of
GSN: Government Security News. Additionally, the variance was due in part to the
loss generated in the second quarter of 2002 by the business that was sold.
General and administrative costs were lower for the six months ended June 30,
2003.
Reconcilations of GAAP to Non-GAAP Financial Measures. Reconciliations of GAAP
to non-GAAP financial measures are provided below. As previously explained,
EBITDA is a measure widely used among media related businesses and is used in
this report because management believes that it is an effective way of
monitoring the operating performance of our company relative to the industry.
EBITDA does not include gains or losses from the sale of subsidiaries.
Six months ended June 30, 2003 2002
--------- ---------
Earnings before interest, taxes, depreciation,
and amortization (EBITDA)
Loss from operations $(507,180) $(103,520)
Depreciation and amortization 93,033 121,750
Minority interest in income of subsidiary -- (81,000)
--------- ---------
EBITDA $(414,147) $ (62,770)
========= =========
EBITDA, excluding the expenses of GSN and the loss of the sold business, for
first six months of 2003 declined $169,661 to a loss of $220,844 compared to a
loss of $51,183 for the same period in 2002. This is primarily attributed to the
increase in costs associated with the expansion of Dan's Hampton Style and The
Hill, which occurred in the second quarter of 2003. Editorial and manufacturing
and distribution costs increased $535,237, and selling expenses increased
$245,609. Revenue gains of $262,911 partially offset the increased costs. The
costs were further offset by a decrease in minority interest of $81,000 and a
decrease in general and administrative
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costs of $267,274.
Six months ended June 30, 2003 2002
--------- --------
EBITDA $(414,147) $(62,770)
GSN operating expenses 193,303 --
EBITDA (loss) from sold business (11,587)
--------- --------
EBITDA, excluding GSN & sold business $(220,844) $(51,183)
========= ========
The Company generated a net loss of $559,620 for the six months ended June 30,
2003 compared with a net loss of $244,747 for the six months ended June 30,
2002. Excluding the net loss of the business sold in 2002, the loss increased
$337,089 in the six months ended June 30, 2003 compared with the same period in
2002. This was attributed to, an increase in editorial, production, and
distribution costs of $535,237, an increase in selling expenses of $245,609, and
the operating costs of GSN of $193,303. These costs were partially offset by an
increase in revenues of $262,911, a decrease in general and administrative
expenses of $267,274, a decrease in depreciation and amortization of $18,088, a
decrease in minority interest of $81,000, and a decrease in the tax provision of
$34,074. Net interest expense increased $26,287.
On a per share basis, the net loss was $0.05 for the first six months of 2003
compared with net loss per share of $0.02 for the first six months of 2002.
Liquidity and Capital Resources
Cash as of June 30, 2003 was $538,496, excluding restricted cash of
$34,102, compared with $670,192, excluding restricted cash of $103,600, for the
same period in 2002. For the six months ended June 30, 2003, total cash used in
operating activities was $279,392, compared to cash provided by operating
activities of $269,898 for the same period in 2002. This was primarily
attributable to the operating loss of $559,620 and an increase in accounts
receivable and other assets of approximately $665,000. This was partially offset
by an increase in accounts payable, accrued expenses and related party payable
of approximately $859,000 and an increase of approximately $93,000 in
depreciation and amortization.
Capital expenditures were $29,237. Cash provided by financing activities
totaled $294,649 and was primarily attributed to $400,000 proceeds from the
issuance of common stock. Cash collected on notes receivable was approximately
$20,000 and payments of approximately $112,000 to the former publisher of The
Hill and approximately $12,500 payments on capital lease obligations and an
automobile loan.
As of June 30, 2003, the Company had current assets of $2,235,098,
including cash of $538,496. At June 30, 2003 the Company had an excess of
current liabilities over current assets in the amount of $818,362. Included is a
$600,000 payment due to the former minority shareholder of Dan's Papers, which
amount can be paid in 2004 without violating the terms of the Company's
agreement with the minority shareholder, and a $112,461 payment due in 2004 to
the former publisher of The Hill for accrued vacation and bonus and to cash-out
a phantom equity interest in Capital Hill.
Historically, in addition to cash from operations, the Company has relied
on financing in the form of sales of equity securities, sales of convertible
notes, and a $1,000,000 Revolving
15
Credit Facility, extended by a shareholder, to meet its working capital
requirements. The Company also generated cash from the recent sale of
subsidiaries that historically did not generate positive cash flow.
Additionally, cash management techniques implemented by the Company in the
fourth quarter of 2001 greatly improved cash flow during the year 2002 and in
the beginning of 2003.
The Company is growing the operations of its core publications, Dan's
Papers and The Hill. Dan's Papers Inc. introduced a new magazine to compliment
its weekly paper. Dan's Hampton Style began in May of 2003 and will continue
through the year. Beginning in March 2003, the Company expanded publication of
The Hill to twice a week, on Tuesdays in addition to Wednesdays. Plans are
further being developed to expand to a third edition later this year or next
year.
A new publication was developed during the second quarter and produced in
July 2003, GSN: Government Security News. It most likely will be sold or closed
because revenue goals were not achieved.
The Company intends to finance these business initiatives and its existing
liabilities from working capital, from additional sales of equity securities,
from the installment payments due to the Company from the sale of subsidiaries
or by a sale of assets. A total of $400,000 has been received in 2003 from the
sale of the Company's common stock. The Company believes that additional
investment to fund the Company's obligations will be received during the course
of 2003. Regardless of whether additional funds are received, the Company
believes that it will have sufficient working capital to fund its operations
through December 31, 2003. During 2004, however, in addition to its ordinary
course obligations, the Company will have to satisfy its $600,000 obligation,
plus interest, due to the former minority owner of Dan's Papers and pay
$112,461, plus interest, to the former publisher of The Hill. In order to meet
these obligations and to finance the full expansion of both its core and new
operations, the Company has determined that approximately $1,400,000 in funds
needs to be raised during the next year. In the event that the Company is not
able to secure additional equity or debt investments, the Company may sell
assets in order to meet its obligations.
NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 3. CONTROLS AND PROCEDURES
As of June 30, 2003 (the end of the period covered by this report), the
Company's management carried out an evaluation, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
the Company's consolidated subsidiaries) required to be included in periodic
reports filed under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
In designing and evaluating the Company's disclosure controls and procedures (as
defined
16
in Rules 13a-15(e) or 15d-15(e) of the Exchange Act), management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurances of achieving the desired control objectives,
as ours are designed to do, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. We believe that our disclosure controls and procedures provide such
reasonable assurance.
17
PART II
OTHER INFORMATION
Item 5. OTHER INFORMATION.
On June 19, 2003, pursuant to a Subscription Agreement, the Company sold
250,000 shares of common stock at a purchase price of $1.00 per share.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
31.1+ Chief Executive Officer's Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2+ Chief Financial Officer's Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1+ Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2+ Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
+ Indicates that exhibit is attached hereto.
Reports on Form 8-K:
None
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 20, 2003 By: /s/ James A. Finkelstein
-----------------------------
James A. Finkelstein
President
Date: August 20, 2003 By: /s/ E. Paul Leishman
------------------------------
E. Paul Leishman
Chief Financial Officer
19