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, 2005
[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 15, 2005 was
12,024,597.
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, 2005......... 3
Unaudited Consolidated Statements of Operations
for the three months and six months ended
June 30, 2005 and 2004........................................ 4
Unaudited Consolidated Statements of Cash Flows
for the six months ended June 30, 2005 and 2004............... 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....................................... 13
PART II. Other Information
Item 6. Exhibits...................................................... 14
Signatures.............................................................. 15
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, 2005
(Unaudited)
Assets
Current:
Cash and cash equivalents $ 327,231
Accounts receivable - net of allowance for doubtful accounts of $168,407 1,759,763
Notes receivable 10,000
Other 171,446
------------
Total current assets 2,268,440
Restricted cash 34,102
Notes receivable, net of current portion 80,000
Property and equipment at cost- net 226,531
Goodwill 314,809
Trade names, net 449,580
Other - net 47,007
------------
Total assets $ 3,420,469
============
Liabilities and Stockholders' deficit
Current liabilities:
Accounts payable $ 1,098,948
Accrued expenses 1,408,763
Income taxes payable 85,077
Notes payable and capital leases, current portion 17,411
Unearned revenue 628,212
Due to related parties 310,257
------------
Total current liabilities 3,548,668
Due to related parties 362,124
Notes payable and capital leases, net of current portion 30,689
------------
Total liabilities $ 3,941,481
------------
Commitments
Stockholders' deficit :
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; 12,682,931 shares
issued and 12,024,597 outstanding 126,829
Paid-in-capital preferred stock 1,568,320
Paid-in-capital common stock 27,429,323
Deficit (28,921,284)
------------
380,717
Less: Treasury stock, (658,334 common shares) - at cost (901,729)
------------
Total stockholders' deficit (521,012)
------------
Total liabilities and stockholder's deficit $ 3,420,469
============
See accompanying notes to unaudited consolidated financial statements.
3
News Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Net revenues $ 4,581,361 $ 4,094,917 $ 6,639,623 $ 5,978,328
----------- ----------- ----------- -----------
Expenses:
Editorial 564,650 510,461 1,011,362 986,091
Production and distribution 1,145,338 982,887 1,709,905 1,531,488
Selling 1,091,501 926,171 1,770,494 1,515,205
General and administrative 1,145,235 1,134,694 2,219,426 2,047,078
Depreciation and amortization 35,949 46,861 70,412 93,300
----------- ----------- ----------- -----------
Total expenses 3,982,673 3,601,074 6,781,599 6,173,162
----------- ----------- ----------- -----------
Income (loss) from operations 598,688 493,843 (141,976) (194,834)
Interest expense, net (13,907) (13,207) (29,525) (29,199)
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes 584,781 480,636 (171,501) (224,033)
Provision for income taxes 69,000 64,774 75,000 64,774
----------- ----------- ----------- -----------
Net income (loss) $ 515,781 $ 415,862 $ (246,501) $ (288,807)
Less: preferred dividends (282) (282) (564) (564)
----------- ----------- ----------- -----------
Net income or (loss) applicable to common stockholders $ 515,499 $ 415,580 $ (247,065) $ (289,371)
=========== =========== =========== ===========
Earnings (loss) per common share:
Basic $ 0.04 $ 0.04 $ (0.02) $ (0.02)
----------- ----------- ----------- -----------
Diluted 0.04 0.03 (0.02) (0.02)
----------- ----------- ----------- -----------
Weighted-average number of common shares outstanding:
Basic 12,024,597 11,644,666 11,956,201 11,636,678
----------- ----------- ----------- -----------
Diluted 13,151,874 12,653,638 11,956,201 11,636,678
=========== =========== =========== ===========
See accompanying notes to unaudited financial statements.
4
News Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six Months ended June 30, 2005 2004
------------------------- --------- -----------
Cash flows from operating activities:
Net loss $(246,501) $ (288,807)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 70,412 93,300
Provision for doubtful accounts 53,000 134,900
Debt conversion expense related party debt 84,406 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (797,466) (1,043,773)
Other assets 23,304 (83,410)
Increase (decrease) in:
Accounts payable and accrued expenses 552,716 151,684
Income taxes payable 75,000 40,977
Other liabilities 99,312 1,287
Related party payable 23,829 21,873
--------- -----------
Net cash used in operating activities $ (61,988) $ (971,969)
--------- -----------
Cash flows from investing activities:
Capital expenditures (40,008) (27,821)
Collection of notes receivable -- 836,000
--------- -----------
Net cash provided by (used in) investing activities $ (40,008) $ 808,179
--------- -----------
Cash flows from financing activities:
Proceeds from related party notes payable 350,000 --
Payment of related party notes payable (331,418) (786,370)
Dividends on preferred stock (564) (564)
Payments of notes payable and capital lease obligations (10,046) (16,756)
--------- -----------
Net cash provided by (used in) financing activities $ 7,972 $ (803,690)
--------- -----------
Net decrease in cash (94,024) (967,480)
Cash, beginning of quarter 421,255 1,166,895
--------- -----------
Cash, end of quarter $ 327,231 $ 199,415
========= ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 38,838 $ 88,560
Income taxes -- 21,716
Non-cash activities:
Conversion of related party notes payable to common stock 261,150 --
Conversion of preferred stock into common stock -- 50,000
See accompanying notes to unaudited consolidated financial statements.
5
NEWS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation:
In the opinion of News Communications, Inc.'s ("NCI" or "the Company")
management, the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information set forth therein. These consolidated financial
statements are condensed and, therefore, do not include all of the information
and footnotes required by generally accepted accounting principles in the United
States of America for complete financial statements. The results for the interim
periods are not necessarily indicative of the results for a full year. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
These consolidated financial statements should be read in conjunction with NCI's
Annual Report on Form 10-KSB for the year ended December 31, 2004 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
applicable to common stockholders by the weighted average number of shares of
common stock outstanding for the period. Diluted earnings per share reflect, in
periods in which they have a dilutive effect, the effect of shares of common
stock issuable upon exercise of common stock equivalents. The assumed conversion
of the options and warrants would have been anti-dilutive and, therefore, were
not considered in the computation of diluted earnings per share for the three
and six months ended June 30, 2005 and 2004.
For the three months ended June 30, 2005 and 2004, convertible preferred shares
convertible into 765,153 and 755,822 weighted average shares of common stock and
convertible notes convertible into 362,124 and 253,150 shares of common stock
were considered in the computation of diluted earnings per share. Weighted
average options to purchase 219,821 and 768,153 shares of common stock for the
three and six months ended June 30, 2005 and 2004 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, 2005 and 2004, convertible preferred shares
convertible into 765,153 and 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 and six months ended June
30, 2005 and 2004, warrants to purchase 3,300,000 and 3,315,873 shares of common
stock were not considered in the computation of diluted earnings per share and
were excluded from the computation of earnings per diluted common share because
in each of these periods the exercise prices of the warrants exceeded the
average fair market value of our common stock and the effect would have been
anti-dilutive. Convertible notes convertible into 362,124 and 253,150 shares of
common stock for the six months ended June 30, 2005 and 2004 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 5, 2005
through November 28, 2015, were all outstanding at June 30, 2005.
The following table sets for the calculation of basic and diluted earnings per
share of common stock:
6
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Weighted-average number of shares on which earnings
per share calculations are based:
Basic 12,024,597 11,644,666 11,956,201 11,636,678
Add - incremental shares associated with convertible
preferred stock 765,153 755,822 -- --
Add - incremental shares associated with convertible debt 362,124 253,150 -- --
----------- ----------- ----------- -----------
Diluted 13,151,874 12,653,638 11,956,201 11,636,678
=========== =========== =========== ===========
Net income (loss) applicable to common
stockholders - basic computation $ 515,499 $ 415,580 $ (247,065) $ (289,371)
Elimination of preferred stock dividend requirements
upon assumed conversion of preferred stock 282 282 -- --
Elimination of interest on convertible preferred debt 6,981 3,989 -- --
----------- ----------- ----------- -----------
Net income on which diluted earnings per share are calculated $ 522,762 $ 419,851 $ (247,065) $ (289,371)
=========== =========== =========== ===========
Earnings (loss) per share of common stock
Basic $ 0.04 $ 0.04 $ (0.02) $ (0.02)
----------- ----------- ----------- -----------
Diluted 0.04 0.03 (0.02) (0.02)
=========== =========== =========== ===========
C. Accounting for Stock-Based Compensation:
The Company has several stock-based employee compensation plans in effect that
were adopted 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, 2005 and 2004.
D. Going Private Transaction
On June 30, 2005, the board of directors of the Company elected to implement a
reverse stock split of the common stock of the Company on the basis of one
post-split share for each 100 pre-split shares and to simultaneously decrease
the authorized shares of common stock of the Company from 100,000,000 shares to
1,000,000 shares. Under the terms of the reverse stock split, stockholders who
would have received fractional shares following the split will receive $1.10 per
share, in cash, for each pre-split share in lieu of such fractional interests.
The board of directors also determined that upon completion of the reverse stock
split the Company will deregister its common stock.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in this Item 2, Management's Discussion and Analysis
or Plan of Operation ("MD&A"), contains "forward looking statements" within the
meaning of Section 27A of the Securities Act 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. Actual results may
materially differ from those projected in the forward-looking statements as a
result of certain risks and uncertainties set forth in this report. Although
management believes that the assumptions made and expectations reflected in the
forward looking statements are reasonable, there is no assurance that the
underlying assumptions will, in fact, prove to be correct or that actual future
results will not be different from the expectations expressed in this report.
News Communications, Inc. is an established publisher of various
advertiser-supported newspapers and magazines. As of June 30, 2005, we published
three newspapers (The Hill, published three times weekly when
7
Congress is in session and weekly when not; Dan's Papers, published weekly for
50 weeks; and Montauk Pioneer , published weekly from April through October and
monthly from November through March), two magazines (Dan's Hampton Style and
Dan's Hampton Sports, which are expected to be published approximately 16 times
during the year), and a guide (Dan's Hampton Style Insider Guide, published
approximately three times a year).
The magazines and the Guide are primarily distributed from East Hampton to
Westhampton Beach, New York, to oceanfront estates and to boutiques and
restaurants.
In April 2005, The Hill introduced The Hill Health Watch, an online subscription
service covering health legislation issues.
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.
Results of Operations:
Three Months Ended June 30, 2005 Compared With Three Months Ended June 30, 2004
Revenues
Revenues increased $486,444, or 12%, in the second quarter of 2005 to $4,581,361
from $4,094,917 for the second quarter of 2004 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 82% of
total revenues, increased 11% to $3,774,504 in the second quarter of 2005
compared with $3,392,512, in the second quarter of 2004. Classified advertising,
which represented 14% of revenues, increased 18% to $655,506 compared to
$554,026 in the second quarter of 2004.
Among the Company's publications, at Dan's Papers classified advertising was
strong and increased 19% and display advertising increased 3%. Display revenues
at the magazines increased 33% compared to the second quarter of 2004. This was
both attributed to the publication of the Guide in the second quarter of 2005
and to an increase in display advertising pages sold. Revenues at The Hill
increased 12%. Display revenues at The Hill increased 12% and classified
advertising increased 9% compared with the second quarter of 2004.
Operating Expenses
Operating expenses for the second quarter of 2005 were $3,982,673 an increase of
11%, compared with operating expenses of $3,601,074 during the second quarter of
2004. This is largely due to the investment in operating costs associated with
the expansion of the magazines and to the costs associated with the increase in
the number of pages printed and to higher paper costs.
Variances in specific expense categories were as follows: editorial, production,
and distribution were 14% higher compared to the three months ended June 30,
2004, due in part to the production and distribution costs associated with the
increase in the number of pages printed, higher paper costs and the publication
of the Guide. Selling expenses were 18% higher for the three months ended June
30, 2005 compared to the same quarter in 2004 due in part to the addition of
sales staff for the magazines and to higher sales commissions on the revenue
gains at all of our publications. General and administrative expenses increased
1% for the three months ended June 30, 2005 compared to the three months ended
June 30, 2004.
Income
Net income for the three months ended June 30, 2005 increased by $99,919 to net
income of $515,781 from net income of $415,862 for the same period in 2004. Net
income applicable for common stockholders increased to
8
$515,499 from $415,580. The income from operations before interest and taxes
increased $104,845 for the three months ended June 30, 2005. Additionally,
depreciation and amortization expense decreased $10,912, interest expense (net
of interest income) increased $700, and the provision for income taxes increased
$4,226.
On a per share basis, the net income was $0.04 for the second quarter of 2005
compared with $0.04 per share for the second quarter of 2004. Diluted net income
per share was $0.04 for the second quarter of 2005 compared with $0.03 for the
second quarter of 2004 due to the assumed conversion of convertible preferred
stock and convertible debt.
Income Taxes
The Company currently has net operating loss (NOL) carryforwards for federal
income tax purposes of approximately $18.6 million, which is available to offset
federal taxable income through the 2024 fiscal year. The Company has provided a
100% valuation allowance on deferred tax assets substantially resulting from the
NOL carryforwards discussed above. The Company recorded a provision for state
and local income taxes for the three months ended June 30, 2005 of $69,000
compared with $64,774 for the same period in 2004.
EBITDA
The Company believes that EBITDA (earnings before interest, taxes, depreciation
and amortization), a non-GAAP financial measure widely used among media related
businesses, is a useful metric for evaluating its financial performance because
of its focus on the Company's results from operations before depreciation and
amortization.
EBITDA is a common alternative measure of performance used by investors,
financial analysts and rating agencies. These groups use EBITDA, along with
other measures, to estimate the value of a company and evaluate a company's
ability to meet its debt service requirements. The EBITDA presented may not be
comparable to similarly titled measures reported by other companies. The Company
believes that EBITDA, while providing useful information, should not be
considered in isolation or as an alternative to other financial measures
determined under GAAP.
The Company's EBITDA, as well as a reconciliation of EBITDA to net income for
the three months ended June 30, 2005 and 2004 is provided below:
Three months ended June 30 2005 2004
-------------------------- -------- --------
EBITDA $634,637 $540,704
Less: Depreciation and amortization (35,949) (46,861)
Less: Interest expense, net (13,907) (13,207)
Less: Income taxes (69,000) (64,774)
-------- --------
Net Income $515,781 $415,862
-------- --------
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
three months ended June 30, 2005, increased $93,933 from $540,704 in the second
quarter of 2004 to $634,637 in the second quarter of 2005. This was primarily
due to the overall increase in revenues of $486,444, which were partially offset
by higher expenses of $392,511, as previously discussed under revenues and
operating expenses.
Six Months Ended June 30, 2005 Compared With Six Months Ended June 30, 2004
Revenues
Revenues increased $661,295, or 11%, to $6,639,623 in the first six months of
2005 compared with $5,978,328 for the first six months of 2004. Variances in
specific revenue categories for the six months ended June 30, 2005 were as
follows: display advertising, which represented 79% of total revenues, increased
10% to $5,255,403 in 2005 compared with $4,790,015 in 2004, and classified
advertising increased 20% to $1,109,254 compared to $923,083 in 2004.
9
Among the Company's individual publications, classified advertising at Dan's
Papers increased $159,055, or 19%, in 2005 compared to 2004, and display
advertising increased 3% in 2005 compared to 2004. Display revenues for the
magazines increased $139,959, or 33%. Revenues at The Hill increased $299,279,
or 11%, with gains in display and classified advertising of 10% and 29%,
respectively.
Operating Expenses
Operating expenses were $6,781,599 for the six months ended June 30, 2005, an
increase of 10%, compared with operating expenses of $6,173,162 for the same
period in 2004. This is due in part to the investment in operating costs
associated with the expansion of the magazines and to the costs associated with
the increase in the number of pages printed and to higher paper costs.
Variances in specific expense categories were as follows: editorial, production,
and distribution increased $203,688, or 8%, compared to 2004. This is largely
due to the costs associated with the increase in the number of pages printed and
to higher paper costs and to the costs associated with the expansion of the
magazines. Selling expenses increased $255,289, or 17%, for the six months ended
June 30, 2005, compared to 2004, primarily due to higher sales commissions on
the revenue gains and to the addition of a sales staff for the magazines.
General and administrative expenses increased $172,348, or 8%, for the six
months ended June 30, 2005 compared to the same period for 2004 due largely to
the overhead costs associated with the establishment of Dan's Hampton Style and
Dan's Hampton Sports, and also due largely to a non-recurring and non-cash debt
conversion charge upon the issuance of shares of common stock in the
satisfaction of certain convertible debt, and in part to a smaller reduction of
corporate liability reserves in 2005 and to salary costs associated with
accounting staff changes, and to the reduction of bad debt expenses in 2005 of
$125,000 compared with a reduction of $40,000 in 2004.
Income
The net loss for the first six months of 2005 was $246,501, an improvement of
$42,306 from a net loss of $288,807 for the first six months of 2004. The
improvement is largely due to revenue gains of $661,295 which were partially
offset by an increase in operating costs of $608,437. Net interest expense
increased $326 and the provision for state and local income taxes increased
$10,226 for the first six months of 2005.
The net loss for the six months ended June 30, 2005, was affected by the
recording of a non-recurring and non-cash debt conversion charge in the amount
of $84,406 as a result of the issuance of shares of common stock in satisfaction
of certain convertible debt. Excluding the non-recurring charge, the net loss
for the six months ended June 30, 2005 improved by $126,712 to a net loss of
$162,095 from a net loss of $288,807 for the same period in 2004. Excluding the
non-recurring charge, the net loss applicable to common stockholders improved to
$162,659 from $289,371. Additionally, excluding the non-recurring charge, the
loss from operations before interest and taxes improved $137,264 for the six
months ended June 30, 2005.
On a per share basis, the net loss was $0.02 for the first six months of 2005
compared with net loss of $0.02 per share for the first six months of 2004.
Income Taxes
The Company currently has net operating loss (NOL) carryforwards for federal
income tax purposes of approximately $18.6 million, which is available to offset
federal taxable income through the 2024 fiscal year. The Company has provided a
100% valuation allowance on deferred tax assets substantially resulting from the
NOL carryforwards discussed above. The Company recorded provisions for state and
local income taxes of $75,000 and $64,774 for the six months ended June 30, 2005
and 2004.
EBITDA
The Company believes that EBITDA (earnings before interest, taxes, depreciation
and amortization), a non-GAAP financial measure widely used among media related
businesses, is a useful metric for evaluating its
10
financial performance because of its focus on the Company's results from
operations before depreciation and amortization.
EBITDA is a common alternative measure of performance used by investors,
financial analysts and rating agencies. These groups use EBITDA, along with
other measures, to estimate the value of a company and evaluate a company's
ability to meet its debt service requirements. The EBITDA presented may not be
comparable to similarly titled measures reported by other companies. The Company
believes that EBITDA, while providing useful information, should not be
considered in isolation or as an alternative to other financial measures
determined under GAAP.
The Company's EBITDA, as well as a reconciliation of EBITDA to net income for
the six months ended June 30, 2005 and 2004 is provided below:
Six months ended June 30 2005 2004
------------------------ --------- ---------
EBITDA $ (71,564) $(101,534)
Less: Depreciation and amortization (70,412) (93,300)
Less: Interest expense, net (29,525) (29,199)
Less: Income taxes (75,000) (64,774)
--------- ---------
Net Loss $(246,501) $(288,807)
--------- ---------
EBITDA, as adjusted $ 12,842 $(101,534)
Less: Debt conversion charge (84,406) --
Less: Depreciation and amortization (70,412) (93,300)
Less: Interest expense, net (29,525) (29,199)
Less: Income taxes (75,000) (64,774)
--------- ---------
Net loss $(246,501) $(288,807)
--------- ---------
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
six months ended June 30, 2005, improved by $29,970 from a loss of $101,534 in
the first six months of 2004 to a loss of $71,564 in the first six months of
2005. This was primarily due to higher revenues, which were partially offset by
higher expenses as previously discussed under revenue and operating expenses.
EBITDA, as adjusted, improved $114,376 to a profit of $12,842 compared with a
loss of $101,534 for the same period in 2004. The EBITDA loss from the debt
conversion charge was $84,406 and was recorded in the first quarter of 2005.
Liquidity and Capital Resources
Cash as of June 30, 2005 was $327,231, excluding restricted cash of $34,102,
compared with $199,415, excluding restricted cash of $34,102, for the same
period in 2004. For the six months ended June 30, 2005, total cash used in
operating activities was $61,988, compared to cash used in operating activities
of $971,969 for the same period in 2004. Cash used in investing activities was
$40,008 for the six months ended June 30, 2005 compared with cash provided by
investing activities for the six months ended June 30, 2004 of $808,179. Cash
provided by financing activities was $7,972 for the six months ended June 30,
2004 compared with cash used in financing activities of $803,690 for the same
period in 2004.
Cash used in operating activities of $61,988 was due in part to the net loss of
$246,501 for the six months ended June 30, 2005 and was $42,306 less than the
net loss for the same period in 2004. Additionally, accounts receivable
increased $797,466 due to increased display and classified revenues. Other
assets, which are prepaid expenses and security deposits, decreased $23,304 due
to reduction of prepaid expense.
As of June 30, 2005, non cash items totaled $207,818 which compared with
$228,200 for the same period in 2004. Depreciation and amortization was $70,412
and was $22,888 less than $93,300 in 2004. Due to lower reserve requirements
attributed to improved realization of receivables, the provision for bad debts
was approximately $53,000, which is less than the provision of $134,900 for
2004. Debt conversion expense, which
11
was non-recurring and non-cash, was $84,406.
As of June 30, 2005, accounts payable and accrued expenses increased $552,716
due largely to the increase in size and volume of our publications in the second
quarter. Accounts payable and accrued expenses decreased $61,388 in the first
quarter due primarily to payment of production expenses for publications
produced in the fourth quarter of 2004. Other liabilities, which consist
primarily of prepaid display advertising for future issues, increased $99,312
due primarily to the increase in volume of prepaid advertisements that were
received. Income taxes payable to state and local governments increased $75,000
and related party payable increased $23,829. The increase in related party
payable is due primarily to accrued interest expense on notes payable to related
parties.
As of June 30, 3005, cash used in investing activities was for capital
expenditures of $40,008 for leasehold improvements for the new offices for the
magazines and to upgrade or replace obsolete computer hardware and software at
our business units and the corporate office.
As of June 30, 2005, cash provided by financing activities totaled $7,972 and
was primarily attributed to proceeds from issuance of 8% convertible notes
payable to related parties that totaled $350,000 which was partially offset by
payment of related party notes payable of $331,418. Payments on notes payable
and capital lease obligations were $10,046. Dividends on preferred stock
totaling $564 were accrued.
As of June 30, 2005, the Company had current assets of $2,268,440, including
cash of $327,231. At June 30, 2005, the Company had an excess of current
liabilities over current assets in the amount of $1,280,228. This deficit
reflects the seasonality of Dan's Papers, Montauk Pioneer, the magazines and the
Guide which are resort area publications. The third fiscal quarter is
traditionally the most significant in terms of revenues and operating income.
Included in the current liabilities is a $300,000 payment due to the former
minority stockholder of Dan's Papers Inc, which amount can be paid in 2006
without violating the terms of the Company's agreement with the minority
stockholder.
In recent years, the Company has relied on financing in the form of sales of
equity securities and issuance of convertible notes, to meet its working capital
requirements. The Company also generated cash from the sale of publications.
On January 20 and January 31, 2005, the Company issued 8% convertible notes in
the face amounts of $224,000 and $126,000, respectively, due July 20, 2006, to
related parties. In the event that the notes are not paid in full on or prior to
the due date, the unpaid balance shall accrue interest at the maximum legally
permitted interest rate until the notes are paid in full. Prior to the Company's
payment in full of the interest and principal on the notes, the principal
amounts of the notes and accrued but unpaid interest thereon is convertible into
shares of common stock of the Company at a price equal to $0.70 per share,
subject to customary anti-dilution adjustments.
At June 30, 2005 the Company had certain cash obligations, which are due as
follows:
Less than After
Total 1 year 1-3 years 4-5 years 5 years
---------- --------- ---------- --------- ----------
Due to related parties $ 672,381 $310,257 $ 362,124
Notes payable and capital lease obligations 48,100 17,411 30,234 455
Interest expense 45,267 13,017 32,250
Operating leases 2,818,874 348,288 715,757 533,253 1,221,576
---------- -------- ---------- -------- ----------
Total $3,584,622 $688,973 $1,140,365 $533,708 $1,221,576
========== ======== ========== ======== ==========
The Company is not a party to any off-balance sheet arrangements.
The Company is continuing to grow the operations of its core publications: Dan's
Papers, Dan's Hampton Style and The Hill. The investments in operating costs
during the six months ended June 30, 2005 were self-funded, in part, by the
growth in advertising revenues. Dan's Hampton Style was originally introduced in
2003 to
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complement Dan's Papers, its weekly newspaper. During the second quarter of
2004, the Company continued the expansion of the publication of Dan's Hampton
Style and introduced Dan's Hampton Sports. Additionally, Dan's Hampton Style
Insider Guide was introduced in December 2004 and an increase to the publication
frequency of the Guide is contemplated for 2005. In April 2005, The Hill
introduced The Hill Health Watch, an online subscription service covering health
legislation issues.
The Company intends to continue to finance these business initiatives and its
existing liabilities from working capital, from additional sales of equity
securities, from borrowings or by a sale of assets. The Company's individual
subsidiaries will generate positive cash flow but not necessarily enough to meet
all capital obligations through December 31, 2005. The Company intends to meet
those capital obligations through additional financing or sale of assets.
Payments due the Company from the sale of publications were received in the
amounts of $661,000, $175,000, and $10,000 in the first, second, and third
quarters of 2004, respectively. One such payment of $10,000 is due the Company
in the third quarter of 2005.
The Company expects to cover working capital needs. The seasonality of Dan's
Papers traditionally generates stronger third quarter results. In the event of a
shortfall, a principal stockholder has committed, between April 15, 2005 and
June 30, 2006, to cover such shortfall in an amount not to exceed $700,000 on
terms to be negotiated with the Board of Directors of the Company.
Subsequent Events
On June 30, 2005, the board of directors of the Company elected to implement a
reverse stock split of the common stock of the Company on the basis of one
post-split share for each 100 pre-split shares and to simultaneously decrease
the authorized shares of common stock of the Company from 100,000,000 shares to
1,000,000 shares. Under the terms of the reverse stock split, stockholders who
would have received fractional shares following the split will receive, in lieu
of fraction interests, $1.10 per share in cash for each pre-split share. The
board of directors also determined that upon completion of the reverse stock
split the Company will deregister its common stock.
In connection with the transactions described above, on July 13, 2005, the
Company filed a Preliminary Information Statement on Schedule 14C and a Schedule
13E-3 with the Securities and Exchange Commission.
ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 2005, 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 to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission's rules and forms.
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 material 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 Exchange Act) during the fiscal quarter ended June 30, 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits:
31.1+ Chief Executive Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2+ Chief Financial Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1+ Chief Executive Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2+ Chief Financial Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
+ Indicates that exhibit is attached hereto.
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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 19, 2005 /s/ James A. Finkelstein
----------------------------------------
James A. Finkelstein
President and Chief Executive Officer
Date: August 19, 2005 /s/ E. Paul Leishman
----------------------------------------
E. Paul Leishman
Chief Financial Officer
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