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, 2004
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-18299
NEWS COMMUNICATIONS, INC.
-------------------------
(Name of Small Business Issuer in Its Charter)
Nevada 13-3346991
---------------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2 Park Avenue, Suite 1405
New York, New York 10016
------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 689-2500
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of common stock outstanding as of August 13, 2004 was
11,649,458.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet at June 30, 2004.................... 3
Unaudited Consolidated Statements of Operations
for the three months and six months ended June 30, 2004 and 2003........ 4
Unaudited Consolidated Statements of Cash Flows
for the six months ended June 30, 2004 and 2003......................... 5
Notes to Unaudited Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation................ 7
Item 3. Controls and Procedures................................................. 12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K......................................... 12
Signatures......................................................................... 13
Certifications
31.1 Chief Executive Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Chief Financial Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
2
PART I
Financial Information
ITEM 1 - Financial Statements
News Communications, Inc. and Subsidiaries
Consolidated Balance Sheet as of June 30, 2004
(Unaudited)
------------------------------------------------------------------------------------------------------
Assets
Current:
Cash and cash equivalents $199,415
Accounts receivable - net of allowance for doubtful accounts of $392,229 1,862,035
Notes receivable 10,000
Other 275,161
------------------------------------------------------------------------------------------------------
Total current assets 2,346,611
Restricted cash 34,102
Notes receivable, net of current portion 90,000
Property and equipment at cost- net 301,163
Goodwill 314,809
Trade names, net 475,643
Other - net 25,070
------------------------------------------------------------------------------------------------------
Total assets $ 3,587,398
======================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,062,627
Accrued expenses 1,188,217
Income taxes payable 40,977
Note payable, current portion 9,894
Unearned revenue 163,334
Due to related parties 613,894
Capital lease, current portion 16,909
------------------------------------------------------------------------------------------------------
Total current liabilities 3,095,852
Due to related parties 253,150
Note payable, net of current portion 26,804
Capital lease, net of current portion 20,669
------------------------------------------------------------------------------------------------------
Total liabilities 3,396,475
------------------------------------------------------------------------------------------------------
Commitments
------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1.00 par value; 500,000 shares authorized: 177,529 shares
issued and outstanding: $1,864,000 aggregate liquidation value 177,529
Common stock, $.01 par value; authorized 100,000,000 shares; 12,307,792 shares
issued and 11,649,458 outstanding 123,078
Paid-in-capital preferred stock 1,568,320
Paid-in-capital common stock 27,086,071
Deficit (27,862,346)
------------------------------------------------------------------------------------------------------
1,092,652
Less: Treasury stock, (658,334 common shares) - at cost (901,729)
------------------------------------------------------------------------------------------------------
Total stockholders' equity 190,923
------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 3,587,398
=====================================================================================================
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, 2004 June 30, 2003 June 30, 2004 June 30, 2003
---------------- -------------- ---------------- --------------
----------------------------------------------------------------------------------------------------------------------------
Net revenues $ 4,094,917 $ 3,225,430 $ 5,978,328 $ 4,796,492
----------------------------------------------------------------------------------------------------------------------------
Expenses:
Editorial 510,461 557,812 986,091 884,796
Production and distribution 982,887 823,535 1,531,488 1,219,988
Selling 926,171 845,312 1,515,205 1,365,945
General and administrative 1,134,694 920,388 2,047,078 1,739,910
Depreciation and amortization 46,861 46,908 93,300 93,033
---------------------------------------------------------------------------------------------------------------------------
Total expenses 3,601,074 3,193,955 6,173,162 5,303,672
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest and provision for income taxes 493,843 31,475 (194,834) (507,180)
Interest income (expense), net (13,207) (10,162) (29,199) (17,514)
Income (loss) before provision for income taxes 480,636 21,313 (224,033) (524,694)
Provision for income taxes 64,774 32,926 64,774 34,926
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 415,862 $ (11,613) $(288,807) $ (559,620)
Preferred stock dividends (282) (282) (564) (564)
---------------------------------------------------------------------------------------------------------------------------
Net income or (loss) available to common stockholders $415,580 $ (11,895) $(289,371) $ (560,184)
Preferred stock dividends 282 - - -
Elimination of Interest on convertible debt 3,989 - - -
---------------------------------------------------------------------------------------------------------------------------
Net income or (loss) applicable to common stockholders $419,851 $ (11,895) $(289,371) $ (560,184)
---------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic $ 0.04 $ (0.00) $ (0.02) $ (0.05)
---------------------------------------------------------------------------------------------------------------------------
Diluted 0.03 (0.00) (0.02) (0.05)
---------------------------------------------------------------------------------------------------------------------------
Weighted-average number of common shares outstanding:
Basic 11,644,666 10,358,641 11,636,678 10,280,581
---------------------------------------------------------------------------------------------------------------------------
Diluted 12,653,638 10,358,641 11,636,678 10,280,581
---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited financial statements.
4
News Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30, 2004 2003
---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net Loss $ (288,807) $ (559,620)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 93,300 93,033
Provision for doubtful accounts 134,900 (7,000)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,043,773) (678,631)
Other current assets (74,486) 10,703
Other assets (8,924) 2,730
Increase (decrease) in:
Accounts payable and accrued expenses 151,684 805,883
Income taxes payable 40,977 12,491
Other liabilities 1,287 -
Related party payable 21,873 41,019
---------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (971,969) (279,392)
---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (27,821) (29,237)
Collection of note receivable 836,000 20,200
---------------------------------------------------------------------------------------------------------------
Net cash from (used in) investing activities 808,179 (9,037)
---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock - 400,000
Payment of related party notes payable (786,370) (112,461)
Dividends on preferred stock (564) (564)
Payment of capital lease obligations (11,809) (9,933)
Payments on automobile loan (4,947) (2,593)
---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (803,690) 274,649
---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (967,480) (13,980)
Cash, beginning of period 1,166,895 552,476
---------------------------------------------------------------------------------------------------------------
Cash, end of period $ 199,415 $ 538,496
===============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 88,560 $ 8,931
Income taxes 21,716 18,919
Non-cash activities:
Purchases of equipment under capital leases - 26,930
Conversion of preferred stock into common stock 50,000 30
======================================================================================================
See accompanying notes to unaudited financial statements.
5
NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation:
In the opinion of News Communications, Inc.'s ("NCI" or "the Company")
management, the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information set forth therein. These consolidated financial
statements are condensed and, therefore, do not include all of the information
and footnotes required by generally accepted accounting principles in the United
States of America for complete financial statements. The results for the interim
periods are not necessarily indicative of the results for a full year. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
The Company is growing the operations of its core publications, Dan's Papers,
Dan's Hampton Style (also called Dan's Magazine Hampton Style), Montauk Pioneer
and The Hill. The Company intends to continue to finance these new business
initiatives and its existing liabilities from working capital, from additional
sales of equity securities, from the installment payments due to the Company
from the sale of subsidiaries or by a sale of assets. A total of $1,400,000 was
raised in 2003 from the sale of the Company's common stock. The Company believes
that it will have sufficient working capital to fund its operations and
obligations through December 31, 2004, due to the seasonality of Dan's Papers
and the anticipated traditionally stronger third quarter results.
These consolidated financial statements should be read in conjunction with NCI's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003 and the
related audited financial statements included therein.
B. Earnings (Loss) per Share:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which
provides for the calculation of "basic" and "diluted" earnings per share. Basic
earnings per share include no dilution and are computed by dividing income
available to common 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.
Convertible preferred shares convertible into 755,822 weighted average shares of
common stock and convertible notes convertible into 253,150 shares of common
stock were considered in the computation of diluted earnings per share for the
three months ended June 30, 2004. Weighted average options to purchase 768,153
and 744,823 shares of common stock for the three and six months ended June 30,
2004 and 2003 were excluded from the computation of earnings per diluted share.
In each of these periods the exercise prices of the options exceeded the average
fair market value of our common stock and the effect would have been
anti-dilutive.
For the six months ended June 30, 2004 convertible preferred shares convertible
into 758,363 weighted average shares of common stock were not considered in the
computation of diluted earnings per share because the effect would have been
anti-dilutive. For the three months and six months ended June 30, 2003,
convertible preferred shares convertible into 765,214 and 767,663 weighted
average shares of common stock, respectively were not considered in the
computation of diluted earnings per share because the effect would have been
anti-dilutive. For the three months ended June 30, 2004 and 2003 and the six
months ended June 30, 2004 and 2003, warrants to purchase 3,315,873 shares of
common stock were not considered in computation of diluted earnings per share
were excluded from the computation of earnings per diluted common share because
in each of these periods the exercise prices of the warrants exceeded the
average fair market value of our common stock and the effect would have been
anti-dilutive. Convertible notes convertible into 237,106 shares of common stock
for the three months ended June 30, 2003 and 253,150 shares and 237,106 shares
for the six months ended June 30, 2004 and 2003, respectively, were not
considered in the computation of diluted earnings per share because the effect
would have been anti-dilutive. The options and warrants, which expire from
July 27, 2004 through November 28, 2015, were all outstanding at June 30, 2004.
The following table sets forth the computation of basic and diluted earnings per
share of common stock.
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- -------------- -------------
Weighted-average number of shares on which earnings per share
calculations are based:
Basic 11,644,666 10,358,641 11,636,678 10,280,581
Add - incremental shares associated with convertible preferred stock 755,822 - - -
Add - incremental shares associated with convertible debt 253,150 - - -
-------------------------------------------------------------------------------------------------------------------------------
Diluted 12,653,638 10,358,641 11,636,678 10,280,581
===============================================================================================================================
Net income (loss) applicable to common stockholders - basic computation $ 415,862 $ (11,613) $ (288,807) $ (559,620)
Elimination of preferred stock dividend requirements upon assumed
conversion preferred stock (282) - - -
Elimination of interest on convertible preferred debt 3,989 - - -
-------------------------------------------------------------------------------------------------------------------------------
Net income on which diluted earnings per share are calculated $ 419,569 $ (11,613) $ (288,807) $ (559,620)
===============================================================================================================================
Earnings (loss) per share of common stock
-------------------------------------------------------------------------------------------------------------------------------
Basic $ 0.04 $ (0.00) $ (0.02) $ (0.05)
-------------------------------------------------------------------------------------------------------------------------------
Diluted 0.03 (0.00) (0.02) (0.05)
===============================================================================================================================
C. Accounting for Stock-Based Compensation:
The Company has several stock-based employee compensation plans in effect that
were entered into in 1987, 1993, and 1999. The Company accounts for all
transactions under which employees receive shares of stock or other equity
instruments in the Company based on the price of its stock in accordance with
the provisions of Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees." No stock-based employee compensation cost is
reflected in net income/loss, as all options granted under the plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant. There were no options granted and no options were vested during
the three and six months ended June 30, 2004 and 2003.
6
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, 2004, we published
3 newspapers (The Hill, Dan's Papers, and Montauk Pioneer) and expanded our
publications with a new magazine in the Hamptons in New York. Dan's Hampton
Style (also called Dan's Magazine Hampton Style). Dan's Hampton Style will be
published on approximately a weekly basis during July and August and on
approximately a monthly basis thereafter.
Dan's Papers Inc. introduced Dan's Hampton Sports in June 2004, an expansion of
the Dan's Magazines brand. The Hamptons have long been known as the "playground
of the rich and famous." From spring until fall, on a monthly basis, Dan's
Hampton Sports will chronicle the activities that have contributed to the
Hamptons' reputation as the place to vacation and play.
The following discussion and analysis of the financial condition and operating
results are based upon the consolidated financial statements of the Company,
which have been prepared in accordance with generally accepted accounting
principles ("GAAP") in the United States of America.
Throughout this Management Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"), management discusses financial measures in
accordance with GAAP and also on a non-GAAP basis. The Company's definition of
EBITDA is earnings before interest, income taxes, depreciation and amortization.
EBITDA does not include gains or losses from the sale of subsidiaries. All
references in this MD&A to EBITDA are to a non-GAAP financial measure. EBITDA, a
measure widely used among media related businesses, is used in this report
because management believes that it is an effective way of monitoring the
operating performance of our company relative to the industry. Additionally, the
Company believes that the use of non-GAAP financial measures enables it and
investors to evaluate, and compare from period to period, the results from
ongoing operations in a more meaningful and consistent manner. A reconciliation
of GAAP to non-GAAP financial measures is included on page 9.
Results of Operations:
Three Months Ended June 30, 2004 Compared With Three Months Ended June 30, 2003
Revenues
Revenues increased $869,487 or 27% in the second quarter of 2004 to $4,094,917
from $3,225,430 for the second quarter of 2003 primarily due to an increase in
advertising pages sold. Variances in specific revenue categories for the three
month period were as follows: display advertising, which represented 83% of
total revenues, increased 24% to $3,392,512 in the second quarter of 2004
compared with $2,728,235 in the second quarter of 2003. Classified advertising,
which represented 14% of revenues, increased 32% to $554,026 from $418,836 in
the second quarter of 2003. Other revenue increased $70,019 to $148,379 in the
second quarter of 2004, largely due to management fees of $62,500 from Marquis
Who's Who LLC.
Among our individual publications, at Dan's Papers classified advertising was
strong and increased 35% and display advertising increased 5%. Display revenues
at Dan's Hampton Style and Dan's Hampton Sports, increased 156% to $428,049
from $167,400 compared to the second quarter of 2003. This is
7
attributed to the publication of three issues of Dan's Hampton Style and the
introductory issue of Dan's Hampton Sports in the second quarter of 2004
compared with the publication of two issues of Dan's Hampton Style in the same
period of 2003. Revenues at The Hill increased 26%, due in part to the
introduction of a third regular weekly issue in February 2004. Classified
advertising increased 6%.
Operating Expenses
Operating expenses for the second quarter of 2004 were $3,601,074, an increase
of 13%, compared with operating expenses of $3,193,955 during the second quarter
of 2003. Excluding operating expenses of $193,303 from a sold publication
(GSN: Government Security News which was sold in September 2003) operating
expenses increased 20% to $3,601,074 in the second quarter of 2004 compared with
$3,000,652 for the second quarter of 2003. This is largely attributed to the
investment in operating costs associated with the expansion of The Hill and
Dan's Hampton Style. A third regular weekly issue of The Hill was added to the
publication schedule in February 2004. Previously in March 2003, expansion at
The Hill began with the publication of a second regular weekly issue. Further
operating costs were incurred in the second quarter of 2004 on the expanded
publication schedule for Dan's Hampton Style and on the introduction of Dan's
Hampton Sports.
Variances in specific expense categories excluding the sold publication were as
follows: editorial, production, and distribution were 10% higher compared to the
three months ended June 30, 2003, due in part to the costs associated with Dan's
Hampton Style and Dan's Hampton Sports, and with publication of a third regular
weekly issue of The Hill, which was introduced in February 2004. Selling
expenses were 35% higher for the three months ended June 30, 2004 compared to
the same quarter in 2003 due in part to the addition of sales staff for Dan's
Hampton Style and Dan's Hampton Sports and to higher sales commissions on the
revenue gains at Dan's Papers, Dan's Hampton Style, Dan's Hampton Sports and The
Hill. General and administrative expenses increased 25% for the three months
ended June 30, 2004 compared to the three months ended June 30, 2003 due in part
to higher employer taxes, office and overhead costs for the establishment of
Dan's Hampton Style and Dan's Hampton Sports, and an $80,000 reduction of bad
debt expense in 2003.
Provision for Income Taxes
The provision for state and local income taxes for the three months ended June
30, 2004 was $64,774 compared with $32,926 for the same period in 2003.
Income
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
three months ended June 30, 2004, increased $462,321 from $78,383 in the second
quarter of 2003 to $540,704 in the second quarter of 2004. Revenues increased
$869,487 and there were gains in all categories at each publication. Editorial,
production, distribution, and selling costs were higher driven by the increase
in the publication schedule of Dan's Hampton Style, the introduction of Dan's
Hampton Sports, and to the addition of a third weekly issue of The Hill.
Operating expenses for the sold business (GSN which was sold in September 2003)
for the second quarter of 2003 were $193,303. General and administrative costs
were higher for the three months ended June 30, 2004 due in part to higher
employer taxes, office and overhead costs for the establishment of Dan's Hampton
Style and Dan's Hampton Sports, and an $80,000 reduction of bad debt expense
in 2003.
Reconciliations of GAAP to Non-GAAP Financial Measures. Reconciliations of GAAP
to non-GAAP financial measures are provided below. As previously explained,
EBITDA is a measure widely used among media related businesses and is used in
this report because management believes that it is an effective way of
monitoring the operating performance of our company relative to the industry.
EBITDA does not include capital gains or losses from the sale of subsidiaries.
8
Three months ended June 30, 2004 June 30, 2003
-------------------------------------------------------------- -------------
Earnings before interest, taxes, depreciation
and amortization (EBITDA)
Income (loss) from operations $ 493,843 $ 31,475
Depreciation and amortization 46,861 46,908
------------------------------------------------------------------------------
EBITDA $ 540,704 $ 78,383
==============================================================================
EBITDA, excluding the operating expenses of GSN: Government Security News which
was sold in September 2003, increased by $269,018, or 99% to 540,704, compared
to $271,686 for the same period in 2003. Revenues increased $869,486,
production, editorial and distribution costs increased $137,543 at Dan's Papers
Inc. and The Hill as previously explained, and selling expenses increased
$238,137 due largely to the establishment of a sales staff for Dan's Hampton
Style and Dan's Hampton Sports and to higher sales commissions and marketing
costs. General and administrative costs increased $224,790 because of the
overhead costs associated with the establishment of Dan's Hampton Style and
Dan's Hampton Sports, higher employer taxes, and a reduction in 2003 of
bad debts.
Three months ended June 30, 2004 June 30, 2003
-------------------------------------------------------------- -------------
EBITDA $ 540,704 $ 78,383
Less: EBITDA from GSN - 193,303
------------------------------------------------------------------------------
EBITDA, excluding sold publication $ 540,704 $ 271,686
==============================================================================
The Company generated a net profit of $415,862 in the second quarter of 2004
compared with a net loss of $11,613 for the second quarter of 2003. Revenues
increased $869,487 and operating expenses increased $407,119. Net interest
expense increased $3,045, and the tax provision for the second quarter of 2004
was $64,774 compared with a tax provision of $32,926 for second quarter of 2003.
On a per share basis, the net income was $0.04 for the second quarter of 2004
compared with $0.0 per share for the second quarter of 2003. Diluted net income
per share was $0.03 due to the assumed conversion of convertible preferred
stock and convertible debt.
Six Months Ended June 30, 2004 Compared With Six Months Ended June 30, 2003
Revenues
Revenues increased $1,181,836 or 25% from $4,796,492 to $5,978,328 compared with
the six months ended June 30, 2003. Variances in specific revenue categories for
the six months ended June 30, 2004 were as follows: display advertising, which
represented 80% of total revenues, increased 23% to $4,790,015 in 2004 compared
with $3,886,800 in 2003 and classified advertising increased 27% to $923,083
compared to $726,017 in 2003. Other revenue increased $81,555 to $265,230 in
2004 compared with $183,675 in 2003, largely due to management fees of $125,000
from Marquis Who's Who LLC.
Among our individual publications, classified advertising was strong at Dan's
Papers Inc. increasing by $178,103, or 27%, in 2004 compared to 2003 and display
advertising increased 11% in 2004 compared to 2003. Display revenues for Dan's
Hampton Style and Dan's Hampton Sports increased $260,649 or 156%. Revenues at
The Hill increased by $468,551, or 20%, due largely to the gains in display
revenue from a third regular weekly issue which was introduced in February 2004.
Operating Expenses
Operating expenses were $6,173,162 for the six months ended June 30, 2004, an
increase of 16%, compared with operating expenses of $5,303,672 for the same
period in 2003. Excluding expenses from a sold publication (GSN: Government
Security News which was sold in September 2003), operating expenses increased
21% to $6,173,162 from $5,110,369 in 2003. This is largely attributed to the
investment in operating costs associated with the expansion of Dan's Hampton
Style and Dan's Hampton Sports, and with the addition of a third regular weekly
9
issue of The Hill which was introduced in February 2004.
Variances in specific expense categories, excluding the sold publication were as
follows: editorial, production, and distribution increased $438,335, or 21%,
compared to 2003. This is primarily due to the costs associated with the
expansion of Dan's Magazines and The Hill, as previously discussed. Selling
expenses increased $326,494, or 27%, for the six months ended June 30, 2004,
compared to 2003, primarily due to higher sales commissions on the revenue gains
and to the addition of a sales staff for Dan's Hampton Style and Dan's Hampton
Sports. General and administrative expenses increased $297,697, or 17%, for the
six months ended June 30, 2004 compared to the same period for 2003 due
primarily to the overhead costs associated with the establishment of Dan's
Hampton Style and Dan's Hampton Sports and to the reduction of bad debt expenses
in 2003 of $145,000.
Provision for Income Taxes
The Company recorded provisions for state and local income taxes of $64,774 and
$34,926, respectively, for the six months ended June 30, 2004 and 2003.
Income
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
six months ended June 30, 2004, improved by $312,513 from a loss of $414,147 in
the first six months of 2003 to a loss of $101,534 in the first six months of
2004. Revenues increased $1,181,836 and there were gains in all categories at
each publication. Editorial, production, distribution, and selling costs were
higher driven by the increase in the publication schedule of Dan's Hampton Style
and Dan's Hampton Sports and to the addition of a third weekly issue of The
Hill. Operating expenses for the sold business (GSN which was sold in September
2003) for the six months ended June 30, 2003 were $193,303. General and
administrative costs were higher for the three months ended June 30, 2004 due in
part to higher employer taxes, office and overhead costs for the establishment
of Dan's Hampton Style and Dan's Hampton Sports, and an $145,000 reduction of
bad debt expense in 2003.
Reconcilations of GAAP to Non-GAAP Financial Measures. Reconciliations of GAAP
to non-GAAP financial measures are provided below. As previously explained,
EBITDA is a measure widely used among media related businesses and is used in
this report because management believes that it is an effective way of
monitoring the operating performance of our company relative to the industry.
EBITDA does not include gains or losses from the sale of subsidiaries.
Six months ended June 30, 2004 June 30, 2003
-------------------------------------------------------------- -------------
Earnings before interest, taxes, depreciation
and amortization (EBITDA)
Loss from operations $ (194,834) $ (507,180)
Depreciation and amortization 93,300 93,033
------------------------------------------------------------------------------
EBITDA $ (101,534) $ (414,147)
==============================================================================
EBITDA, excluding the operating expenses of the sold publication, for the first
six months of 2004 improved by $119,310 to a loss of $101,534 compared to loss
of $220,844 for the same period in 2003. This is primarily attributed to the
revenue gains of $1,181,836, an increase in editorial, production and
distribution costs of $438,335, and increase in selling expenses of $326,494,
and an increase in general and administrative costs of $297,697.
Six months ended June 30, 2004 June 30, 2003
------------------------------------------------------------------------------
EBITDA $ (101,534) $ (414,147)
Less: EBITDA from GSN - 193,303
------------------------------------------------------------------------------
EBITDA, excluding sold publication $ (101,534) $ (220,844)
==============================================================================
10
The net loss for the first six months of 2004 decreased $270,813 to $288,807
from a net loss of $559,620 for the first six months of 2003. This is due in
part to the operating costs of approximately $193,303 generated in the first six
months of 2003 by the publication that was sold. Additionally, the improvement
is due to revenue gains of $1,181,836 in the first six months of 2004, an
increase in operating costs of $1,062,793. Net interest expense increased
$11,685 and the provision for state and local income taxes increased $29,848 in
the first six months of 2004.
The $0.02 loss per share in the first six months of 2004 improved from a $0.05
loss per share in the first six months of 2003.
Liquidity and Capital Resources
Cash as of June 30, 2004 was $199,415, excluding restricted cash of $34,102,
compared with $538,496, excluding restricted cash of $34,102, for the same
period in 2003. For the six months ended June 30, 2004, total cash used in
operating activities was $971,969, compared to cash used in operating activities
of $279,392 for the same period in 2003. This was primarily attributable to the
net loss of $288,807 in 2004, an increase in accounts receivable of $1,043,773
and an increase in other assets of $83,410. This was partially offset by cash
provided by an increase in accounts payable and accrued expenses of $151,684, an
increase in income taxes payable of $40,977, and an increase in related party
payable of approximately $21,873. Depreciation and amortization expense was
$93,300 and the bad debt provision was approximately $134,900.
Capital expenditures were $27,821. Cash from investing activities was $808,179
and was primarily attributed to $836,000 in cash collected on notes receivable.
Cash expenditures for financing activities was $803,690 and was largely due to
payment of related party notes payable of $786,370. Payments related to capital
lease obligations were $11,809, payments on automobile loans were $4,947, and
dividends of $564 on preferred stock were accrued.
As of June 30, 2004, the Company had current assets of $2,346,611, including
cash of $199,415. At June 30, 2004, the Company had an excess of current
liabilities over current assets in the amount of $749,241. This deficit reflects
the seasonality of Dan's Papers, Dan's Hampton Style, Montauk Pioneer, and Dan's
Hampton Sports (new in summer of 2004) which are resort area publications. The
third fiscal quarter is the most significant in terms of revenues and operating
income and is expected to fully fund the deficit. Included in the current
liabilities is a $600,000 payment due to the former minority shareholder of
Dan's Papers, which amount can be paid in 2005 without violating the terms of
the Company's agreement with the minority shareholder.
At June 30, 2004, there were no material changes in the ordinary course of
business to the contractual obligations of the Company. The Company is not party
to any off-balance sheet arrangements.
Historically, in addition to cash from operations, the Company has relied on
financing in the form of sales of equity securities, sales of convertible notes,
and a $1,000,000 Revolving Credit Facility, extended by a shareholder which has
since been terminated, to meet its working capital requirements. The Company
also generated cash from sale of subsidiaries.
The Company is continuing to grow the operations of its core publications, Dan's
Papers, Dan's Hampton Style and The Hill. These investments in operating costs
during the six months ended June 30, 2004 were self-funded, in part, by the
growth in advertising revenues. Dan's Hampton Style was originally introduced in
2003 to compliment Dan's Papers, its weekly newspaper. During the second quarter
of 2004, the Company began expansion of the publication of Dan's Hampton Style
and introduced Dan's Hampton Sports. In February of 2004, the Company continued
weekly publication of a third issue of The Hill, which was published certain
weeks of the fourth quarter of 2003. Previously in March 2003, the Company
expanded publication of The Hill to twice a week on Tuesdays.
The Company intends to continue to finance these business initiatives and its
existing liabilities from working capital, from additional sales of equity
securities, from the installment payments due to the Company from the sale of
subsidiaries or by a sale of assets. A total of $1,400,000 was raised in 2003
from the sale of the Company's common stock and a total of $661,000 was received
in the first quarter of 2004, and $175,000 in the
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second quarter of 2004 from payments due to the Company from the sale of
publications. The Company believes that it will have sufficient working capital
to fund its operations and obligations through December 31, 2004, due to the
seasonality of Dan's Papers and the anticipated traditionally stronger third
quarter results.
ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 2004, the Company's management carried out an evaluation, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including the Company's consolidated subsidiaries)
required to be included in periodic reports filed under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
In designing and evaluating the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act), management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurances of achieving the desired
control objectives, as ours are designed to do, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. We believe that our disclosure controls and
procedures provide such reasonable assurance.
There have not been any significant changes in the Company's internal controls
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended) during our
fiscal second quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 1. Election of Directors.
The Company held its annual meeting on June 3, 2004. During the annual meeting,
the stockholders elected James A. Finkelstein, Jerry Finkelstein, Wilbur L.
Ross, Jr., Martin A. Bell, Gary Weiss, Martin Mendelsohn and Matthew Doull, to
serve as directors for a term expiring at the next annual meeting:
Name of Director Votes For Votes Withheld
---------------- --------- --------------
James A. Finkelstein 8,743,109 9,014
Jerry Finkelstein 8,743,109 9,014
Wilbur L. Ross, Jr. 8,743,109 9,014
Martin A. Bell 8,743,109 9,014
Gary Weiss 8,749,554 2.569
Martin Mendelsohn 8,704,554 2,569
Matthew Doull 8,749,552 2,531
Item 2. RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The stockholders ratified the selection of BDO Seidman LLP as the Company's
independent registered public accounting firm for fiscal year 2004. There were
8,750,025 votes for ratification; 1,885 votes against; 213 votes abstaining; and
no broker non-votes.
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
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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 23, 2004 /s/ James A. Finkelstein
----------------------------
James A. Finkelstein
President and Chief Executive Officer
Date: August 23, 2004 /s/ E. Paul Leishman
-------------------------
E. Paul Leishman
Chief Financial Officer
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