UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended September 30, 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 November 12, 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 September 30, 2003...................................................... 3 Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2003 and 2002................................................ 4 Unaudited Consolidated Statements of Cash Flows for the nine months ended September 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.................................................... 15 PART II. Other Information Item 5. Other Information.......................................................... 17 Item 6. Exhibits and Reports on Form 8-K........................................... 17 Signatures................................................................................... 18 Certifications............................................................................... 19 31.1 Chief Executive Officer's Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Chief Financial Officer's Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 2 PART I Financial Information ITEM 1 - Financial Statements News Communications, Inc. and Subsidiaries Consolidated Balance Sheet as of September 30, 2003 Assets Current: Cash $308,890 Accounts receivable - net of allowance for doubtful accounts of $331,942 1,580,756 Notes Receivable 803,823 Other 178,432 -------------------------------------------------------------------------------------------- Total current assets 2,871,901 Restricted Cash 34,102 Notes Receivable, net of current portion 341,667 Property and equipment at cost- net 389,233 Goodwill 314,809 Trade names, net 495,190 Other - net 17,860 -------------------------------------------------------------------------------------------- $ 4,464,762 -------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,233,700 Accrued expenses 1,145,550 Income taxes payable 1,291 Note payable, current portion 9,894 Unearned revenue 135,099 Due to related parties 768,978 Capital lease, current portion 23,618 -------------------------------------------------------------------------------------------- Total current liabilities 3,318,130 Due to related parties 841,139 Note payable, net of current portion 34,679 Capital lease, net of current portion 31,674 -------------------------------------------------------------------------------------------- Total liabilities 4,225,622 -------------------------------------------------------------------------------------------- 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 (26,814,129) -------------------------------------------------------------------------------------------- 1,140,869 Less: Treasury stock, (658,334 common shares) - at cost (901,729) -------------------------------------------------------------------------------------------- Total stockholders' equity 239,140 -------------------------------------------------------------------------------------------- $ 4,464,762 -------------------------------------------------------------------------------------------- See accompanying notes to unaudited financial statements. 3 News Communications, Inc. and Subsidiaries Consolidated Statements of Operations (UNAUDITED) Three Months Ended Nine Months Ended --------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2003 2002 2003 2002 ------------ ------------- --------------------------------- -------------------------------------------------------------------------------------------------------------------------- Net revenues $ 3,514,747 $ 3,518,929 $ 8,311,239 $ 9,648,231 --------------------------------------------------------------------------------------------------------------------------- Expenses: Editorial 534,805 313,685 1,419,601 881,963 Production and distribution 1,126,176 1,062,461 2,346,164 2,726,308 Selling 823,483 760,321 2,189,428 2,131,546 General and administrative 1,109,690 1,206,932 2,849,600 3,714,654 Depreciation and amortization 50,986 63,092 144,019 184,842 --------------------------------------------------------------------------------------------------------------------------- Total expenses 3,645,140 3,406,491 8,948,812 9,639,313 --------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations, before interest, minority interest in income of subsidiary and provision (benefit) for income taxes (130,393) 112,438 (637,573) 8,918 Gain on sale of publication 123,316 - 123,316 - --------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations, before interest, minority interest in income of subsidiary and provision (benefit) for income taxes (7,077) 112,438 (514,257) 8,918 Interest income (expense), net (10,080) 4,829 (27,594) 13,602 Minority interest in income of subsidiary - (40,500) - (121,500) --------------------------------------------------------------------------------------------------------------------------- Income (loss) before provision (benefit) for income taxes (17,157) 76,767 (541,851) (98,980) Provision (benefit) for income taxes (2,424) 2,082 32,502 71,082 --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (14,733) $ 74,685 $ (574,353) $ (170,062) --------------------------------------------------------------------------------------------------------------------------- Income (loss) per common share: Basic and diluted $ (0.00) $ 0.01 $ (0.06) $ (0.02) --------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding: Basic and diluted 10,589,410 10,686,411 10,383,740 10,686,411 --------------------------------------------------------------------------------------------------------------------------- See accompanying notes to unaudited financial statements. 4 News Communications, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2003 2002 -------------------------------------------------------------------------------------------------- Cash flows from operating activities Net Loss $(574,353) $ (170,062) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 144,019 184,842 Provision for doubtful accounts 147,100 321,700 Minority interest - 121,500 Gain on sale of publication (123,316) - Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (1,256,119) (312,204) Other current assets 3,640 5,704 Restricted cash - (1,798) Other assets 4,487 60,702 Increase (decrease) in: Accounts payable and accrued expenses 1,002,665 342,999 Income taxes payable 1,291 - Other liabilities 56,250 6,210 Related party payable 62,443 11,967 -------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (531,893) 571,560 -------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (47,593) (41,036) -------------------------------------------------------------------------------------------------- Net cash used in investing activities (47,593) (41,036) -------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of common stock and warrants 400,000 - Payment of related party notes payable (112,461) - Dividend on preferred stock (846) (846) Payment of capital lease obligations (17,206) (13,418) Payments on automobile loan (3,787) - Payment of other current liabilities - (300,000) Collection of note receivable 70,200 50,000 -------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 335,900 (264,264) -------------------------------------------------------------------------------------------------- Net decrease in cash (243,586) 266,260 Cash, beginning of year 552,476 596,505 -------------------------------------------------------------------------------------------------- Cash, end of period $ 308,890 $ 862,765 -------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 11,573 $ 3,894 Cash paid during the year for income taxes 27,449 92,095 Non-cash activities: Purchases of equipment under capital leases 34,309 - Purchase of automobile - debt incurred 22,454 22,226 Purchase of minority interest - debt incurred - 1,600,000 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 continue to finance these new business initiatives and its existing liabilities from working capital, from additional sales of equity securities, from the installment payments due to the Company from the sale of subsidiaries or by a sale of assets. A total of $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 up to $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 nine months ended September 30, 2003 and 2002. For the nine months ended September 30, 2003, options to purchase 768,154 shares of common stock, warrants to purchase 3,315,873 shares of common stock, convertible preferred shares convertible into 769,608 shares of common stock, and convertible notes convertible into 241,139 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 shares. These options and warrants, which expire from July 27, 2004 through November 28, 2015, were all outstanding at September 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 6 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 did 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 did not 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 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 23,331 options granted and vested in the three and nine months ended September 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". 7 --------------------------------------------------------------------------------------------------------- Three months ended Nine Months Ended --------------------------------------------------------------------------------------------------------- September 30, September 30, September 30, September 30, 2003 2002 2003 2002 --------------------------------------------------------------------------------------------------------- Net income (loss), as reported $(14,733) $ 74,685 $(574,353) $(170,062) --------------------------------------------------------------------------------------------------------- Less: Total stock-based employee compensation expense determined under fair value based method for all awards (8,213) (10,969) (8,213) (121,706) --------------------------------------------------------------------------------------------------------- Proforma net loss $(22,946) $ 63,716 $(582,566) $(291,768) ========================================================================================================= Basic net income (loss) per share: --------------------------------------------------------------------------------------------------------- As reported (0.00) 0.01 (0.06) (0.02) --------------------------------------------------------------------------------------------------------- Proforma (0.00) 0.01 (0.06) (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. F. Sale of Publication: On September 30, 2003, NCI completed the sale of the assets of GSN: Government Security News, to World Business Media LLC for $125,000 resulting in a net gain of approximately $123,000. GSN, a new publication that was produced in July 2003, did not meet revenue goals and was discontinued. As part of the proceeds, the buyer paid cash of $25,000 and issued to NCI a note in the principal amount of $100,000 with interest of 5% per annum. The note is payable in installments of $10,000 plus accrued interest, $10,000 plus accrued interest, and $80,000 plus accrued interest on the first, second and third anniversary dates, respectively. The note is secured by a security interest in all of the assets of World Business Media, LLC. 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 September 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, GSN did not meet revenue goals and the publication was discontinued and ultimately sold as of September 30, 2003. 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 11 through 14. 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 84% of revenues from operations are from display advertising sales and 12% are from classified advertising sales. Unearned revenues of approximately $135,100 at September 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 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 $1,581,000, net of allowance for doubtful accounts of approximately $332,000 at September 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 September 30, 2003. 9 Income Taxes. We have a history of operating losses. These losses generated a sizeable federal tax net operating loss, or NOL carryforwards, of approximately $17.4 million as of September 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 23,331 options granted and vested in the three and nine months ended September 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 Nine Months Ended --------------------------------------------------------------------------------------------------------- September 30, September 30, September 30, September 30, 2003 2002 2003 2002 --------------------------------------------------------------------------------------------------------- Net income (loss), as reported $(14,733) $ 74,685 $(574,353) $(170,062) --------------------------------------------------------------------------------------------------------- Less: Total stock-based employee compensation expense determined under fair value based method for all awards (8,213) (10,969) (8,213) (121,706) --------------------------------------------------------------------------------------------------------- Proforma net loss $(22,946) $ 63,716 $(582,566) $(291,768) ========================================================================================================= Basic net income (loss) per share: --------------------------------------------------------------------------------------------------------- As reported (0.00) 0.01 (0.06) (0.02) --------------------------------------------------------------------------------------------------------- Proforma (0.00) 0.01 (0.06) (0.03) --------------------------------------------------------------------------------------------------------- Results of Operations: Three Months Ended September 30, 2003 Compared With Three Months Ended September 30, 2002 Revenues Revenues from businesses excluding those from sold businesses (Queens Tribune and related publications that were sold in November 2002 and GSN: Government Security News which was sold in September 2003) increased $770,181 or 28.9% in the third quarter of 2003 compared to the third quarter of 2002. Overall revenues for the third quarter including the sold businesses were essentially flat, with a modest decline of 0.1% to $3,514,747 compared with $3,518,929 in the third quarter of 2002. Variances in specific revenue categories for the three month period excluding the sold business were as follows: display advertising, which represented 87% of total revenues in the quarter, increased 25% to $2,993,649 in the third quarter of 2003 compared with $2,391,116 in the third quarter of 2002 and classified advertising increased 31% to $311,072 compared to $237,415 in 2002. Subscription revenues increased $23,130 to $53,358 in the third quarter of 2003. The Company received management fees of $68,750 in the third quarter of 2003 from Marquis Who's Who LLC, pursuant to an oral agreement that is in the process of 10 being reduced to writing. Among our individual operating units, display advertising was strong at Dan's Papers Inc. increasing 26%. 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 third quarter by 35%. Revenues for The Hill increased 24% with the introduction of a second issue on Tuesdays. Operating Expenses Operating expenses for the third quarter of 2003 were $3,645,140, an increase of 7%, compared with operating expenses of $3,406,491 during the third quarter of 2002. Excluding expenses from sold and discontinued businesses (Queens Tribune and related publications that were sold in November 2002 and GSN: Government Security News which was sold in September 2003) operating expenses increased 33% to $3,494,966 in the third quarter of 2003 compared with $2,627,199 for the third quarter of 2002. This is largely attributed to the investment in operating costs associated with the expansion of The Hill with a second weekly issue which started in March 2003 and the introduction in May 2003 of Dan's Hampton Style. Variances in specific expense categories, excluding the sold businesses, were as follows: editorial, production, and distribution were 54% higher compared to the three months ended September 30, 2002, primarily due to the costs associated with the introduction in March 2003 of a second weekly issue of The Hill and with the introduction in May of Dan's Hampton Style. Selling expenses were 37% higher for the three months ended September 30, 2003 compared to the same quarter in 2002 primarily due to higher sales commissions on the revenue gains in the quarter from the second edition of The Hill and from Dan's Hampton Style and to the establishment of a New York sales office. Expenditures for market research, direct advertising and promotional materials for new business initiatives increased in the third quarter of 2003. General and administrative expenses increased 11% for the three months ended September 30, 2003 compared to the three months ended September 30, 2002 due primarily to a $10,000 reduction of bad debt expense in 2003 compared with a reduction of $89,000 in 2002. Provision for Income Taxes The Company recorded a provision (benefit) for state and local income taxes of $(2,424) and $2,082, respectively, for the three months ended September 30, 2003 and 2002. Income EBITDA (earnings before interest, taxes, depreciation and amortization) for the three months ended September 30, 2003, declined by $214,437 from $135,030 in the third quarter of 2002 to a loss of $79,407 in the third quarter of 2003. EBITDA for the third quarter of 2002 includes the EBITDA contribution of a sold business of $83,117. Furthermore, 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, Government Security News the new publication previously discussed that was sold in September 2003. General and administrative costs were higher for the three months ended September 30, 2003 due primarily to a $10,000 reduction of bad debt expense in 2003 compared with a reduction of $89,000 in 2002. 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. 11 --------------------------------------------------------------------------------------------------- Three months ended --------------------------------------------------------------------------------------------------- September 30, 2003 September 30, 2002 --------------------------------------------------------------------------------------------------- Earnings before interest, taxes, amortization and depreciation (EBITDA) --------------------------------------------------------------------------------------------------- Income (loss) from operations $(130,393) $112,438 --------------------------------------------------------------------------------------------------- Depreciation and amortization 50,986 63,092 --------------------------------------------------------------------------------------------------- Minority interest in income of subsidiary - (40,500) --------------------------------------------------------------------------------------------------- EBITDA $ (79,407) $135,030 =================================================================================================== EBITDA, excluding the operating expenses of GSN in the third quarter of 2003 and the profit of the sold business for the third quarter of 2002 but including the expansion costs at both Dan's Papers Inc. and The Hill, declined $64,760 to a loss of $12,847 compared to $51,913 for the same period in 2002. Largely due to the introduction of Dan's Hampton Style and the expansion of The Hill, revenues increased in the third quarter by $770,181. The investment in the expansion at Dan's and The Hill resulted in an increase in editorial and manufacturing and distribution costs of $560,176 and an increase in selling expenses of $208,474. These costs were partially offset by a decrease in minority interest of $40,500. General and administrative costs increased $106,791, due primarily to a $10,000 reduction of bad debt expense in 2003 compared with a reduction of $89,000 in 2002. ------------------------------------------------------------------------------------------- Three months ended ------------------------------------------------------------------------------------------- September 30, 2003 September 30, 2002 ------------------------------------------------------------------------------------------- EBITDA $ (79,407) $ 135,030 ------------------------------------------------------------------------------------------- Less: EBITDA from GSN 66,560 - ------------------------------------------------------------------------------------------- Less: EBITDA from sold business - (83,117) =========================================================================================== EBITDA, excluding sold business $ (12,847) $ 51,913 =========================================================================================== The Company generated a net loss of $14,733 in the third quarter of 2003 compared with a net profit of $74,685 for the third quarter of 2002. Excluding the net income (loss) of the businesses sold in 2003 and 2002, the Company generated net income of $52,908 in third quarter of 2003, an improvement of $56,030 compared with a net loss of $3,122 the third quarter of 2002. This was attributed to an increase in revenues of $770,181 and to the gain on the sale in September 2003 of the assets of GSN of $123,316. These gains were partially offset by an increase in editorial, production, and distribution costs of $560,176 and an increase in selling expenses of $208,474. General and administrative expenses increased $106,791 due primarily to a $10,000 reduction of bad debt expense in 2003 compared with a reduction of $89,000 in 2002. These cost increases were partially offset by a decrease in depreciation and amortization expense of $7,672, a decrease in minority interest of $40,500, and a decrease in the tax provision of $4,506. Net interest expense increased $14,706 in the third quarter of 2003. On a per share basis, the net loss was $0.00 for the third quarter of 2003 compared with net income per share of $0.01 for the third quarter of 2002. Nine Months Ended September 30, 2003 Compared With Nine Months Ended September 30, 2002 Revenues Revenues excluding those from sold businesses (Queens Tribune and related publications that were sold in November 2002 and GSN: Government Security News which was sold in September 2003) increased $1,033,094 or 14% in the first nine months of 2003 compared to the first nine months of 2002. Overall revenues for the first nine months including the sold business decreased $1,336,992 or 14% to $8,311,239 compared with $9,648,231 in the first nine months of 2003. Variances in specific revenue categories for the first nine months of 2003 excluding the sold business were as follows: display advertising, which represented 84% of total revenues, increased 11% to $6,880,500 in the first nine months of 2003 compared with $6,177,216 in the first nine months of 2002 and classified advertising increased 16% to $1,037,090 compared to $893,235 in 2002. Other revenue, including management fees from Marquis Who's Who LLC and subscription revenue, increased $186,006 to $310,965 in 2003 compared with $124,959 in 2002. 12 Among our individual operating units, display advertising was strong at Dan's Papers Inc. increasing 17% which was largely attributed to the introduction of Dan's Hampton Style and classified advertising which continued to grow in the first nine months by 16%. Revenues for The Hill for the first nine months increased 8%, due largely to the gains in display revenue from the introduction of a second issue on Tuesdays and a third issue in certain weeks of the third quarter. Operating Expenses Operating expenses during the first nine months of 2003 were $8,948,812, a decrease of 7%, compared with operating expenses of $9,639,313 during the first nine months of 2002. Excluding expenses from sold businesses (Queens Tribune and related publications that were sold in November 2002 and GSN: Government Security News which was sold in September 2003), operating expenses increased 19% to $8,605,336 in the first nine months of 2003 compared with $7,242,082 for the first nine months of 2002. This is largely attributed to the investment in operating costs associated with the expansion of The Hill with a second weekly issue that started in March and a third issue in certain weeks of the third quarter, and the introduction in May of Dan's Hampton Style. Variances in specific expense categories, excluding the sold businesses were as follows: editorial, production, and distribution were 42% higher compared to the nine months ended September 30, 2002. This is primarily due to the costs associated with the introduction in March 2003 of a second weekly issue of The Hill and a third issue in certain weeks of the third quarter and the introduction in May 2003 of Dan's Hampton Style. Selling expenses were 29% higher for the nine months ended September 30, 2003 compared to the period 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, direct advertising, and promotional materials for new business initiatives increased in the first nine months of 2003. General and administrative expenses decreased 5% for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. Provision for Income Taxes The Company recorded provisions for state and local income taxes of $32,502 and $71,082, respectively, for the nine months ended September 30, 2003 and 2002. Income EBITDA (earnings before interest, taxes, depreciation and amortization) for the nine months ended September 30, 2003, declined by $565,814 from a profit of $72,260 in the first nine months of 2002 to a loss of $493,554 in the first nine months of 2003. EBITDA for the first nine months of 2002 includes the EBITDA contribution of a sold business of $71,531. Furthermore, revenue gains generated by the expansion of Dan's Hampton Style and The Hill were largely offset by the investment in the corresponding editorial, production, distribution, and selling expenses and to the operating costs of GSN: Government Security News, which was sold in the third quarter. Additionally, the variance was due in part to the profit generated in the third quarter of 2002, which benefited EBITDA for the first nine months of 2002, by the business that was sold. General and administrative costs were lower for the nine months ended September 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. 13 --------------------------------------------------------------------------------------------------- Nine Months Ended --------------------------------------------------------------------------------------------------- September 30, 2003 September 30, 2002 --------------------------------------------------------------------------------------------------- Earnings before interest, taxes, depreciation and amortization (EBITDA) --------------------------------------------------------------------------------------------------- Income (loss) from operations $(637,573) $ 8,918 --------------------------------------------------------------------------------------------------- Depreciation and amortization 144,019 184,842 --------------------------------------------------------------------------------------------------- Minority interest in income of subsidiary - (121,500) =================================================================================================== EBITDA $(493,554) $ 72,260 =================================================================================================== EBITDA, excluding the businesses that were sold and discontinued, for first nine months of 2003 declined $234,421 to a loss of $233,692 compared to a profit of $729 for the same period in 2002. Largely due to the introduction of Dan's Hampton Style and the Tuesday issues of The Hill, revenues increased for the first nine months of 2003 by $1,033,094. However, the investment in the expansion at Dan's and The Hill resulted in an increase in editorial and manufacturing and distribution costs of $1,095,414 and an increase in selling expenses of $454,083. These costs were partially offset by a decrease in minority interest of $121,500 and a decrease in general and administrative costs of $160,482. ----------------------------------------------------------------------------------------- Nine Months Ended ----------------------------------------------------------------------------------------- September 30, 2003 September 30, 2002 ----------------------------------------------------------------------------------------- EBITDA $(493,554) $ 72,260 ----------------------------------------------------------------------------------------- Less: EBITDA from GSN 259,862 - ----------------------------------------------------------------------------------------- Less: EBITDA from sold business (71,531) ========================================================================================= EBITDA, excluding sold business $(233,692) $ 729 ========================================================================================= The Company generated a net loss of $574,353 for the nine months ended September 30, 2003 compared with a net loss of $170,062 for the nine months ended September 30, 2002. Excluding the net loss of the businesses sold in 2002 and 2003, the loss increased $87,757 in the nine months ended September 30, 2003 compared with the same period in 2002. This was attributed to an increase in revenues of $1,033,094 and to the gain on the sale in September 2003 of the assets of GSN of $123,316. These gains were largely offset by an increase in editorial, production, and distribution costs of $1,095,414 and an increase in selling expenses of $454,083. These higher costs were partially offset by a decrease in general and administrative expenses of $160,483, a decrease in depreciation and amortization of $25,760, a decrease in minority interest of $121,500, and a decrease in the tax provision of $38,580. Net interest expense increased $40,993. On a per share basis, the net loss was $0.06 for the first nine months of 2003 compared with net loss per share of $0.02 for the first nine months of 2002. Liquidity and Capital Resources Cash as of September 30, 2003 was $308,890, excluding restricted cash of $34,102, compared with $862,765, excluding restricted cash of $104,103, for the same period in 2002. For the nine months ended September 30, 2003, total cash used in operating activities was $531,893, compared to cash provided by operating activities of $571,560 for the same period in 2002. This was primarily attributable to the net loss of $574,353 in 2003, an increase in accounts receivable and other assets of approximately $1,248,000, and the gain on the sale of the assets of a discontinued business. This was partially offset by an increase in accounts payable, accrued expenses, other liabilities, and related party payable totaling approximately $1,123,000, approximately $144,000 in depreciation and amortization, and the bad debt provision of approximately $147,000. Capital expenditures were $47,593. Cash provided by financing activities totaled $335,900 and was primarily attributed to $400,000 in proceeds from the issuance of common stock. Cash collected on notes receivable was approximately $70,000 and payments of approximately $112,000 to the former publisher of The Hill and approximately $21,000 in payments primarily related to capital lease obligations. Dividends on preferred stock totaling $846 were accrued. 14 As of September 30, 2003, the Company had current assets of $2,871,901, including cash of $308,890. At September 30, 2003 the Company had an excess of current liabilities over current assets in the amount of $446,229. Included in the current liabilities is a $600,000 payment due to the former minority shareholder of Dan's Papers, which amount can be paid in 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 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 newspaper. 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, and a third issue was published in certain weeks of the fourth quarter. Plans are further being developed to continue publication of the third issue later this year and next year. Substantial investments in operating costs were made in the third quarter of 2003, which were in part self-funded by the growth in advertising revenues. A new publication that was developed during the second quarter and produced in July 2003, GSN: Government Security News, was discontinued because revenue goals were not achieved. The assets were sold in September 2003 and generated a gain of $123,316. The Company intends to continue to finance these business initiatives and its existing liabilities from working capital, from additional sales of equity securities, from the installment payments due to the Company from the sale of subsidiaries or by a sale of assets. A total of $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 and is presently in discussions to that end. 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 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 up to $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. ITEM 3. CONTROLS AND PROCEDURES As of September 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 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 15 judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide such reasonable assurance. Subsequent to the date of the evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls, nor were any corrective action required with regard to significant deficiencies and material weaknesses. 16 PART II OTHER INFORMATION ITEM 5. OTHER INFORMATION 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 17 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 19, 2003 /s/ James A. Finkelstein ______________________________ James A. Finkelstein President and Chief Executive Officer Date: November 19, 2003 /s/ E. Paul Leishman ______________________________ E. Paul Leishman Chief Financial Officer 18