UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934. For the fiscal year ended December 31, 2004.
OR
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ______________ to ______________.
Commission File Number: 0-18299
NEWS COMMUNICATIONS, INC.
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(Name of Small Business Issuer in Its Charter)
Nevada 13-3346991
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2 Park Avenue, Suite 1405
New York, New York 10016
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 689-2500
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were
$12,168,133.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 28 2005, is $2,143,831. The
Company's common stock is traded on the Pink Sheets.
The number of shares of common stock outstanding as of March 16, 2005
was 12,682,931.
Transitional Small Business disclosure formats (Check one):
Yes [ ] No [X]
PART I
The information set forth in this Report on Form 10-KSB including,
without limitation, that contained in Item 6, Management's Discussion and
Analysis and Plan of Operation, contains "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results may
materially differ from those projected in the forward-looking statements as a
result of certain risks and uncertainties set forth in this report. Although
management believes that the assumptions made and expectations reflected in the
forward-looking statements are reasonable, there is no assurance that the
underlying assumptions will, in fact, prove to be correct or that actual future
results will not be different from the expectations expressed in this report.
Item 1. Description of Business
As used herein, unless the context requires otherwise, the terms "we,"
the "Company," or "NCI," each respectively refers to News Communications, Inc.
and its subsidiaries.
Overview
News Communications, Inc. is a Nevada corporation formed in 1986.
Through our subsidiaries, we publish and distribute advertiser-supported
publications. We currently publish three newspapers and some related magazines
through three offices. The principal source of our revenues is selling
advertising space in our publications since the publications are principally
distributed free of charge.
Present Publications
Our current Publications are as follows:
Publisher Publication
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Dan's Papers Inc.............. Dan's Papers, Montauk Pioneer, Dan's Magazine
Hampton Style, Dan's Magazine Hampton Style
Insider Guide and Dan's Magazine Hampton Sports
Capitol Hill Publishing Corp.
("Capitol Hill")........... The Hill
Dan's Papers
For the past 45 years Dan's Papers has been a favorite of people who
visit or live in the Hamptons. Dan's Papers focuses on the lifestyle, culture,
arts, entertainment, politics and social issues of interest to the resort areas
of the South and North Forks of Eastern Long Island, New York, particularly the
wealthy Hamptons resort area. Its articles and columns include humor, news,
celebrity profiles, reviews of art gallery shows, real estate, restaurants,
concerts, nightclubs and movies, social satire, editorial cartoons and political
issues, extensive entertainment listings, as well as special sections. Dan's
Papers is published weekly in tabloid format with a glossy cover. It is
distributed primarily to retail locations on Eastern Long Island and estate home
delivery. There is also a weekly distribution in Manhattan.
In 2004, we continued to expand our publications with a new glossy
magazine in the Hamptons in New York, Dan's Hampton Style (also called Dan's
Magazine Hampton Style), which was launched in 2003. Dan's
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Hampton Style focuses on fashion, culture, arts, architecture and the stylish
lifestyle of the Hamptons of Long Island. In 2004, the magazine was published
six times in July and August and seven times during the rest of the year. It is
distributed to oceanfront estates from East Hampton to Westhampton Beach, New
York, to boutiques and restaurants, and a special distribution to exclusive
addresses in New York City.
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." Published three times during the summer,
Dan's Hampton Sports chronicles the activities that have contributed to the
Hamptons' reputation as the place to vacation and play.
Also introduced in 2004 was Dan's Hampton Style Insider Guide. The
guide is published for those people who choose to make the Hamptons and environs
their year-round homes or visit throughout the year. The guide focuses on
operating hours and contact information for many businesses and services
including restaurants, shops, gyms, fitness centers, spas, emergency services
throughout the East End of Long Island. The Guide was published and distributed
in December.
The staff at Dan's Papers also publishes the Montauk Pioneer. Dan's
Papers and Montauk Pioneer are published out of offices in Bridgehampton, New
York. Dan's Hampton Style and Dan's Hampton Sports and Dan's Hampton Style
Insider Guide are published out of offices in Southampton, NY.
The Hill
The Company began publication of The Hill in September 1994. The Hill
is a newspaper that is devoted to the coverage of the United States Congress.
Until March 2003, The Hill was published weekly and it was expanded to twice
weekly publication on March 24, 2003. Beginning on February 3, 2004, the Company
expanded publication of The Hill to three times weekly, on Tuesday, Wednesday,
and Thursday when Congress is in session and weekly when Congress is not in
session. It has become required reading for members of Congress, their staff,
and those who follow Congress. The paper, which offers comprehensive coverage of
every aspect of Congress and life on Capitol Hill, is distributed free of charge
to members of Congress and their staffs, governmental agencies, lobbyists,
government relation departments of corporations and similar groups. The Hill
derives the largest portion of its revenue from the sale of display advertising
to companies wishing to get their message in front of the decision-makers in
Congress. The Hill derives by far the largest portion of additional revenues
from classified advertising. A small amount of revenue comes from subscriptions
to the newspaper. The Hill is printed on newsprint and is operated out of
offices in Washington, D.C.
New Business Initiatives
An expanded publication schedule will be introduced in 2005 for Dan's
Hampton Style Insider Guide. It was first introduced in December 2004 as a guide
to the year-round residents and visitors of the off-season operating hours and
contact information of businesses and services. The publishing schedule for 2005
will be expanded to approximately three times annually.
In April 2005, Capitol Hill plans to introduce The Hill Health Watch,
an online subscription service covering health legislation issues.
Printing and Production
Independent printing shops print each of our publications. We transmit
electronic files to the printer for reproduction. In each case, the printer
provides all of the necessary materials, such as paper and ink, for printing,
and bills the Company for its services and materials used. We believe that we
obtain our printing services at competitive prices, and if the arrangements that
we have with any of our printers should terminate,
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we believe that we can find similarly favorable arrangements with several other
printing shops in or around New York City. We use several printers and are not
overly reliant on any one vendor.
Advertisers and Readers; Marketing Activities
All publications are primarily controlled (free) circulation. The
primary source of our revenue is selling advertising space in the publications.
The advertising revenues for the Dan's Papers publications are derived from a
wide variety of businesses and individuals reflecting the various opportunities,
tastes and demands of the residents of each of the targeted distribution areas.
Advertisers in The Hill are primarily companies who wish to make views known to
Congress and other entities that advertise employment positions. No one
advertiser represents more than 5% of our advertising revenues. We employ sales
representatives who are largely paid through incentive-based compensation
packages.
Competition
We compete most directly for advertising revenues with newspapers and
magazines as well as other advertising media in the geographic and the vertical
market in which we operate. We do not significantly compete for circulation
revenues with publishers of newspapers or magazines, as our publications are
distributed primarily free of charge to readers.
Dan's Papers competes with The Independent, also free to readers, and
to a lesser extent there is competition with local newspapers such as the East
Hampton Star and the Southampton Press. Dan's Hampton Style and Dan's Hampton
Sports compete with Hamptons Magazine and Hampton Cottages & Gardens, also free
circulation publications. The Montauk Pioneer, serves the community of Montauk
and competes with the Montauk Sun and Montauk Life publications.
The Hill, which is the largest controlled circulated paper on Capitol
Hill, services the same market as Roll Call. The Hill also competes for
advertising with two other publications, The National Journal and Congressional
Quarterly.
Employees
As of December 31, 2004, we had 92 full-time and 4 part-time
employees, of whom 28 were engaged as editorial personnel; 32 were engaged as
display and classified advertising sales personnel; 15 were engaged in
production and distribution; and 21 were engaged in administrative and clerical
activities. We also have free-lance editorial contributors. We consider our
relations with our employees to be satisfactory. No union represents any of our
employees.
Seasonality
Dan's Papers, Dan's Hampton Style, Dan's Hampton Sports, Dan's Hampton
Style Insider Guide, and Montauk Pioneer, which are resort area newspapers and
magazines, have significant seasonal variations in revenues. This seasonality
may cause operating results to vary significantly from quarter to quarter, with
the third fiscal quarter being the most significant in terms of revenues and
income. The Hill's revenues also vary throughout the year depending on whether
or not Congress is in session.
Where You Can Find More Information
The Company files annual, quarterly and special reports, proxy
statements and other information with the SEC. Our SEC filings are available to
the public over the Internet at the SEC's web site at http://www.sec.gov. You
may also read and copy any document we file at the SEC's public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms.
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Item 2. Description of Properties
The Company operated out of three separate locations until April 2004
when it began to operate out of a fourth location.
We extended a lease, which was originally signed for a five year term
on November 3, 1999, at 2 Park Avenue in New York City for a period of 18
months. The 2,900 square feet of office space serves as our executive offices
including the centralization of our finance and administrative staff. The annual
base rent for the lease extension is approximately $115,700.
Dan's Papers leases 2,810 square feet of office space in a building at
2221 Montauk Highway, Bridgehampton, New York, at an annual rental of
approximately $81,800, plus consumer price index increases. The lease terminates
in October 2008. The Company has an option to renew this lease for an additional
five-year term.
The Company has a month to month lease for 1,000 square feet of office
space in a building at 33 Flying Point Road, Southampton, New York, at an annual
rental of approximately $38,400. The Company is seeking an alternative office
space location.
In 2004, Capitol Hill extended its lease, scheduled to terminate July
21, 2004, on a month to month basis, for approximately 4,000 square feet of
office space at 733 15th Street, N.W., Washington, D.C. The annual rent for the
month to month lease is approximately $103,300. Also in 2004, Capitol Hill
extended a lease, scheduled to terminate July 21, 2004, on a month to month
basis for additional office space of approximately 700 square feet, also at 733
15th Street, N.W., Washington, D.C.. The annual rent for the month to month
lease is approximately $21,600.
In 2005, Capitol Hill entered into a new lease for approximately 6,810
square feet of office space at 1625 K Street, N.W., Washington, DC for ten years
terminating June 1, 2015, at an annual rate of approximately $204,300. Capitol
Hill will move all of the operations to this new location in 2005. The Company
has an option to renew this lease for an additional five-year term.
We believe that our present space for Dan's Papers, including the
additional space taken in 2004 for Dan's Hampton Style, Dan's Hampton Style
Insider Guide and Dan's Hampton Sports, Capitol Hill and the corporate office is
adequate for current purposes and offers moderate expansion possibilities.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
During the last quarter of fiscal 2004, no matters were submitted to a
vote of security holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our shares trade on the Pink Sheets under the trading symbol
"NCOM.PK". The following table sets forth, for the periods indicated, the range
of high and low closing bid quotations. The bid quotations set forth below
reflects inter-dealer prices, without retail mark-up, markdown or commission and
may not necessarily represent actual transactions.
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High Low
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Year Ended December 31, 2004
First Quarter ........... $0.91 $0.70
Second Quarter .......... $0.85 $0.79
Third Quarter ........... $1.00 $0.84
Fourth Quarter .......... $0.86 $0.65
Year Ended December 31, 2003
First Quarter ........... $0.85 $0.80
Second Quarter .......... $0.88 $0.80
Third Quarter ........... $0.86 $0.79
Fourth Quarter .......... $0.81 $0.66
On March 28, 2005, the last reported sales price for our shares was
$0.70 per share. At December 31, 2004, we had 1,058 stockholders of record.
We have never paid cash dividends on our common stock and do not
expect to pay such dividends in the foreseeable future. Except for dividends we
may be required to pay on our 8% and 10% preferred stock, we currently intend to
retain any future earnings for use in our business. The payment of any future
dividends on our common stock will be determined by our Board in light of the
conditions then existing, including our financial condition and requirements,
future prospects, restrictions in future financing agreements, business
conditions and other factors deemed relevant by the Board.
Dividends on the 10% preferred stock are payable annually in an amount
of $500 per share of 10% preferred stock, in cash or in shares of common stock
having a fair market value of $500, payable on September 19th of each year.
Dividends on the 10% preferred stock may be paid in shares of common stock to
the extent we have sufficient authorized but unissued common stock. Annual
dividends on the 8% preferred stock of $80 per share are accrued, but not paid.
See "Consolidated Financial Statements" for more information regarding our
securities and any dividends we have paid.
The Company has failed to make four consecutive payments and as such
the holders of our 8% preferred stock are entitled to vote until such time as
all unpaid and accumulated dividends are paid in full.
Recent Sale of Unregistered Securities
The securities described below were issued by us during 2004, 2003 and 2002
and were not registered under the Securities Act of 1933. Each of the
transactions is claimed to be exempt from registration with the SEC pursuant to
Section 4(2) of the Securities Act as transactions not involving a public
offering. All of such securities, other than the dividends paid on shares of
preferred stock in shares of common stock, are deemed to be restricted
securities for the purposes of the Securities Act.
1. On May 16, 2002, we issued 600 shares of common stock in connection with
the conversion of 1 share of the 10% Convertible Preferred Stock.
2. On January 17, 2003, we issued 3,000 shares of common stock in
connection with the conversion of 5 shares of 10% Convertible Preferred Stock.
3. 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.
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4. On March 24, 2003, pursuant to a Subscription Agreement, Melvin A. Weiss
purchased 50,000 shares of the Company's common stock at a purchase price of
$1.00 per share.
5. On May 1, 2003, pursuant to a Subscription Agreement, Venturetek LP
purchased 50,000 shares of the Company's common stock at a purchase price of
$1.00 per share.
6. On June 19, 2003, pursuant to a Subscription Agreement, Kinder
Investments LP purchased 250,000 shares of the Company's common stock at a
purchase price of $1.00 per share.
7. On December 4, 2003, we issued 39,281 shares of common stock in
connection with the conversion of 10,000 shares of the 10% Convertible Preferred
Stock.
8. On December 16, 2003, pursuant to a Subscription Agreement, Venturetek
LP purchased 1,000,000 shares of our common stock at a purchase price of $1.00
per share.
9. On May 4, 2004, we issued 20,767 shares of common stock in connection
with the conversion of 5,000 shares of $10 Convertible Preferred Stock.
10. In January 2005, we issued 8% convertible notes in the face amounts of
$224,000 and $126,000 to Kinder Investments LP and Rosalind Davidowitz. The
notes are convertible into common stock at a conversion price of $0.70 per
share.
11. On February 3, 2005, pursuant to a Subscription Agreement with, D.H.
Blair Investment Banking Corp., we satisified $200,000 of our 8% convertible
note plus accrued interest thereon of $62,597 by issuing 375,139 shares of
common stock at a price of $0.70 per share.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis provide information which
management believes is relevant to an assessment and understanding of our
results of operations and financial condition. The discussion should be read in
conjunction with our audited consolidated financial statements and notes
thereto.
Critical Accounting Policies
The NCI discussion and analysis of its 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 in the United States of America. Our significant
accounting policies are described in Note 2 to the consolidated financial
statements included in Item 7 of this Form 10-KSB.
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 83% of revenues from
operations are from display advertising sales and 13% are from classified
advertising sales. Unearned revenues of approximately $528,900 at December 31,
2004 represent future display and classified advertisements 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
$1,015,000, net of allowance for doubtful accounts of approximately $229,000, at
December 31, 2004.
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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
December 31, 2004.
Income Taxes. We have a history of operating losses. These losses
generated a sizeable federal tax net operating loss, or NOL, carryforwards, of
approximately $17.9 million as of December 31, 2004. Generally accepted
accounting principles in the United States of America 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 NOLs. We currently provide for income taxes only to the
extent that we expect to pay cash taxes (primarily state and local 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.
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
Revenue
Overall revenues for the year ended December 31, 2004 increased
$1,938,052 or 19% to $12,168,133 compared with $10,230,081 for the year ended
December 31, 2003. Variances in specific revenue categories for the year 2004
were as follows: display advertising, which represented 83% of total revenues,
increased 18% to $10,125,595 in 2004 compared with $8,589,440 in 2003, and
classified advertising increased 25% to $1,522,901 compared to $1,214,235 in
2003. Other revenue, primarily a full year of management fees from Marquis Who's
Who LLC which was partially offset by a small reduction in subscription revenue,
increased $93,231 to $519,637 in 2004 compared with $426,406 in 2003.
Among our individual operating units, display advertising was strong
at Dan's Papers Inc. increasing by $1,124,712, or 24% in 2004 compared to 2003,
which was largely attributed to the expansion of Dan's Hampton Style, to the
introduction of Dan's Hampton Sports and Dan's Hampton Style Insider Guide, and
classified advertising which increased 26% in 2004 compared to 2003. Revenues
for The Hill increased by $504,626, or 12%, due largely to the gains in display
revenue from the expanded publication from two issues to three issues weekly
when Congress is in session, and weekly when Congress is not in session.
Operating Expenses
Operating expenses were $13,128,689 in 2004, an increase of 13%,
compared with operating expenses of $11,568,739 in 2003. This was largely
attributed to the investment in operating costs associated with the expansion of
The Hill and Dan's Hampton Style and Dan's Hampton Sports. Additional operating
costs were incurred in the fourth quarter of 2004 with the introduction of Dan's
Hampton Style Insider Guide. 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.
Variances in specific expense categories were as follows: editorial,
production, and distribution increased $797,443, or 16%, compared to 2003. This
is primarily due to the costs associated with the expansion of Dan's Hampton
Style, the introduction of Dan's Hampton Sports and Dan's Hampton Style Insider
Guide and the expansion of The Hill, as previously discussed. Selling expenses
increased $672,599, or 24%, for the year ended December 31, 2004 compared to
2003, primarily due to higher sales commissions on the revenue gains throughout
the year and to the addition of a sales staff for Dan's Hampton Style and and
the introduction of Dan's Hampton Sports. Included in selling
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expenses were expenditures for market research, direct advertising, and
promotional materials for new business initiatives which increased $53,905 in
2004. General and administrative expenses increased $92,298, or 3%, for the year
ended December 31, 2004 compared to December 31, 2003 due primarly to the
overhead costs associated with the establishment of offices for Dan's Hampton
Style and Dan's Hampton Sports.
Income
Net loss for the full year 2004 decreased $271,108 to a net loss of
$1,061,808 from a net loss of $1,332,916 for the year 2003. Net loss available
for common stockholders decreased to $1,104,246 from $1,334,044. The operating
loss before gain on sale of a publication, interest and taxes improved $378,102
from the year ended December 31, 2003. Additionally, depreciation and
amortization expense decreased $2,391, interest expense (net of interest income)
increased $18,089, and the provision for income taxes increased $21,330.
Income Taxes
We currently have net operating loss (NOL) carryforwards for federal
income tax purposes of approximately $17.9 million, which is available to offset
federal taxable income through the 2024 fiscal year. We have provided a 100%
valuation allowance on deferred tax assets substantially resulting from the NOL
carryforwards discussed above. We recorded a provision of approximately $44,500
for state and local income taxes for the year ended December 31, 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, as adjusted is EBITDA excluding the
loss of a sold publication.
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
loss for the two years ended December 31, 2004 and 2003 is provided below:
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Years ended December 31, 2004 2003
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EBITDA $ (771,276) $(1,146,987)
Gain on sale of publication - 67,575
Depreciation and amortization (189,280) (191,671)
Interest expense, net (56,746) (38,657)
Income taxes (44,506) (23,176)
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Net loss (1,061,808) (1,332,916)
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EBITDA, as adjusted $ (771,276) $ (887,125)
Add: EBITDA from sold publication - (259,862)
Gain on sale of publication - 67,575
Depreciation and amortization (189,280) (191,671)
Interest expense, net (56,746) (38,657)
Income taxes (44,506) (23,176)
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Net loss (1,061,808) (1,332,916)
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EBITDA improved by $375,711 for the year ended December 31, 2004 from
a loss of $1,146,987 for the year ended December 31, 2003 to a loss of $771,276
for the year ended December 31, 2004. 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 by $115,849, or 14% to a loss of
$771,276, compared to a loss of $887,125 for the same period in 2003. The
EBITDA loss from the sold publication was $259,862 in 2003.
Effects of Inflation
We do not believe that inflation has had a significant impact on our
financial position or the results of operations in the past three years.
Retirement of Outstanding Indebtedness
As of December 31, 2004, we had outstanding an 8% Convertible Note in
the principal amount of $200,000, plus accrued interest of $61,150, that is due
on the earlier of (a) July 31, 2005, or (b) upon the sale of the stock or assets
of a subsidiary to the extent that the cash proceeds from such transactions
equal or exceed $1,000,000. As described in "Liquidity and Capital Resources"
below, on February 3, 2005, we discharged this note and the accrued interest in
exchange for shares of common stock. We also have a deferred purchase obligation
to the former minority stockholder of Dan's Papers relating to the acquisition
of all of the stock of Dan's Papers in the principal amount of $600,000, bearing
interest at prime plus one percent, which was due on November 27, 2004. Pursuant
to a letter agreement, the due date was amended to provide payment in two equal
installments on November 29, 2004 and on November 28, 2005. The Company paid the
November 2004 installment of $300,000, plus accrued interest of $34,346, in
January 2005, without violating the terms of the Company's agreement with the
minority stockholder. The second installment due on November 28, 2005, plus
interest at 8% per annum can be paid in 2006 without violating the terms of the
agreement with the minority stockholder.
Liquidity and Capital Resources
Cash as of December 31, 2004 was $421,255, excluding restricted cash
of $34,102, compared with $1,166,895, excluding restricted cash of $34,102, for
the same period in 2003. For the year ended December 31, 2004, total cash used
in operating activities was $679,439, compared to cash used in operating
activities of
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$819,259 for the same period in 2003. This was primarily attributable to the
net loss of $1,061,808 in 2004, Additionally, accounts receivable and other
assets increased $101,236 and $24,936, respectively. The increase in accounts
receivable was due largely to the 18% increase in display revenues. Other assets
are primarily security deposits on office leases which increased due primarily
to the establishment of offices for Dan's Hampton Style and Dan's Hampton
Sports.
Depreciation and amortization was $189,280 which was modestly less
than $191,671 in 2003. The provision for bad debts was approximately $39,100,
which is less than the provision for 2003 of $103,800, due to lower reserve
requirements attributed to improved realization of receivables.
Accounts payable and accrued expenses decreased $144,165 due primarily
to more timely payment of production and distribution costs and to lower accrued
legal and professional fees. This was offset by an increase of income taxes
payable, other liabilities and related party payable of $10,077, $366,853, and
$47,396, respectively. State and local corporate taxes increased due primarily
to increased profit of Capitol Hill. The increase in other liabilities is due
primarily to prepaid display advertising of approximately $280,000 from
advertisers that was received in December for future issues. The increase in
related party payable is due primarily to accrued interest expense on notes
payable to related parties.
Cash flows from investing activities included proceeds from collection
of notes receivable of $846,000 and capital expenditures of $53,508. In
previous years the Company sold subsidiaries and a publication and recorded
notes receivable in connection therewith. Capital expenditures were primarily
for computer hardware and software associated with the establishment of offices
for Dan's Hampton Style and Dan's Hampton Sports and to upgrade and replace
obsolete computer hardware and software at our other business units and the
corporate office.
Cash used in financing activities totaled $858,693 and was primarily
attributed to payment of related party notes payable of $786,370. Payments on
note payable and capital lease obligations were $32,885. Dividends on preferred
stock totaling $39,438 were accrued.
As of December 31, 2004, the Company had current assets of $1,664,783,
including cash of $421,255. At December 31, 2004, the Company had an excess of
current liabilities over current assets in the amount of $1,479,361. Included in
the current liabilities is $600,000 due to the former minority stockholder of
Dan's Papers, which amount can be paid in 2005 or 2006 without violating the
terms of the agreement.
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
subsidiaries.
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.
As described more fully in Notes 5 and 6 of the Notes to Consolidated
Financial Statements, at December 31, 2004 the Company had certain cash
obligations, which are due as follows:
-10-
Less than After
Total 1 year 1-3 years 4-5 years 5 years
-----------------------------------------------------------
Due to related parties $ 892,568 $631,418 $261,150 $ - $ -
Notes payable and capital leases 58,146 18,752 39,394
Interest expense 76,181 55,588 20,593
Operating leases 2,709,184 218,371 664,115 512,987 1,313,711
-----------------------------------------------------------
Total $3,736,079 $924,129 $985,252 $512,987 $1,313,711
-----------------------------------------------------------
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 year ended December 31, 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 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 February of
2004, the Company continued weekly publication of a third issue of The Hill.
During certain weeks of the fourth quarter of 2003, the Company also published a
third issue of The Hill. 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. 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 obligations through additional financing or sale of assets. There was no
sale of the Company's common stock in 2004. A total of $1,400,000 was raised in
2003 from the sale of the Company's common stock. In 2004, 20,767 shares of the
Company's common stock were issued upon the conversion of 5,000 shares of the
Company's $10 Convertible Preferred stock at no additional charge. 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.
The Company expects to cover working capital needs; in the event of a
shortfall, a principal stockholder is committed, between April 15, 2005 and
April 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.
Recent Accounting Standards
In December 2004, the FASB issued FAS No. 123(R), "Share-Based
Payment." This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement changes the accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
This Statement does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in FAS 123 as originally
issued and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services." This Statement is effective for interim and annual periods
beginning after June 15, 2005 and applies to all outstanding and unvested
stock-based payment awards at the date of adoption. We anticipate the adoption
of FAS 123(R) will affect our results of operations to an extent similar to that
as presented in our FAS 123 pro forma disclosure included in the accompanying
audited 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
-11-
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.
Item 7. Financial Statements
The consolidated financial statements of NCI and its subsidiaries,
including the notes thereto, together with the report thereon of BDO Seidman,
LLP is presented beginning at page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 8A. Controls and Procedures
As of December 31, 2004 (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 judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We believe that our disclosure
controls and procedures provide such reasonable assurance.
During the quarter ended December 31, 2004, 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 actions
required with regard to significant deficiencies and material weaknesses.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Our executive officers, directors and other significant employees and
their ages and positions are as follows:
--------------------------------------------------------------------------------
Name of Individual Age Title
--------------------------------------------------------------------------------
James A. Finkelstein (1) 56 President, Chief Executive Officer and Director
--------------------------------------------------------------------------------
Jerry Finkelstein (2) 89 Chairman of the Board of Directors
--------------------------------------------------------------------------------
-12-
--------------------------------------------------------------------------------
Wilbur L. Ross, Jr. (1) 66 Director
--------------------------------------------------------------------------------
Martin A. Bell 53 Director
--------------------------------------------------------------------------------
Gary Weiss (1)(2) 42 Director
--------------------------------------------------------------------------------
Martin Mendelsohn (3) 62 Director
--------------------------------------------------------------------------------
Matthew Doull 35 Director
--------------------------------------------------------------------------------
E. Paul Leishman 57 Chief Financial Officer and Secretary
--------------------------------------------------------------------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
James A. Finkelstein has been President, Chief Executive Office and a
Director of NCI since June 2001. Mr. Finkelstein has been Executive Chairman of
Thompson Publishing Group since May 2004. He serves as President of Marquis
Who's Who, LLC. He is a consultant serving as Chairman of Global Media Partners
of DLJ Merchant Banking Partners III since January 2004. Previously he has
served as media partner to DB Capital Partners in 2002 and 2003 and a media
consultant to Veronis Suhler Stevenson in 2002. He was President of JAF
Communications, Inc. from 1999 to 2001. From 1979 to 1998 he served as CEO of
the National Law Publishing Company. He has been the Publisher of the New York
Law Journal and The National Law Journal. He currently serves as a Director of
Advanstar Communications. Mr. Finkelstein has served on the Board of Directors
of the Legal Aid Society, and New York University's Faculty of Arts and Sciences
Board of Overseers, and was awarded an Honorary Doctor of Laws degree from
Hofstra University.
Jerry Finkelstein has been Chairman of the Board of Directors since
1993, and a Director of NCI since December 1987. He served as publisher of The
New York Law Journal from 1960 to 1984. Mr. Finkelstein is a former member of
the Board of Directors of Rockefeller Center, Inc., Chicago Milwaukee
Corporation, Chicago Milwaukee Railroad Corporation and TPI Enterprise, Inc.,
formerly Telecom Plus International Inc., a communications company. He is also a
former Commissioner of the Port Authority of New York and New Jersey. Mr.
Finkelstein is the father of James A. Finkelstein, the President, Chief
Executive Officer and a Director of NCI.
Wilbur L. Ross, Jr. has been a Director of NCI since October 1996. Mr.
Ross served as Chief Executive Officer of NCI from October 1996 to August 1999.
From 1988 to March 2000, Mr. Ross was Executive Managing Director of Rothschild
Inc. and Chairman of Rothschild Recovery Fund and Asia Recovery Fund. On April
1, 2000, Mr. Ross purchased the controlling interest in the General Partner of
these funds and Rothschild Recovery Fund was renamed WLR Recovery Fund. Mr. Ross
resigned from Rothschild Inc. and organized WL Ross & Co. L.L.C., a merchant
banking firm with headquarters in New York. Mr. Ross is a Director of Syms
Corp., a clothing retailer, Tong Yang Life Insurance Co. (Korea), Clarent
Hospital Corp. and Nikko Electric. He is the Chairman of the Board of
International Steel Group, Marquis Who's Who, LLC, International Textile Group,
International Coal Group, Nano-Tex Inc. and Ohizumi Manufacturing Co. He also
serves as a member of the Alternative Investments Committee of the New York
Society of Security Analysts.
Martin A. Bell has been a Director of NCI since July, 1999. He has
been Vice Chairman of D.H. Blair Investment Banking Corp. since December 1995,
prior to which time he served as Senior Vice President and General Counsel to
the firm.
Gary Weiss has been a Director of NCI since July, 1999. He is a
Founding Partner in Valeo Partners LLC, a strategic advisory and consulting firm
founded in 2002. He has also served as President of Weiss Capital Group LLC, an
investment and consulting firm since 1997.
-13-
Martin Mendelsohn has been a Director of NCI since July, 1999. Since
2001, he has been a partner at Schnader Harrison Segal & Lewis. From 1992
through 2001, he was a partner at Verner, Liipfert, Bernhard, McPherson and
Hand.
Matthew Doull has been a Director of NCI since August 5, 2002. He is
responsible for global media investments at Bailey Coates Asset Management, a
London-based fund management firm, and has been Director of the Bailey Coates
Cromwell Fund since 2003. Previously he was responsible for private equity
investments at a large newspaper publishing company, Hollinger International
from 1997 to 2004, prior to which he was Associate Publisher of Wired Magazine.
He serves on the Vestry of Grace Church in New York. From 1998 to 2000, Mr.
Doull served as Chairman of Trip.com Inc.
E. Paul Leishman has been Chief Financial Officer of NCI since June
2001 prior to which he was Corporate Controller since September 2000. From
August 1996 through December 1999, Mr. Leishman was Corporate Controller of
Thomson Newspapers, Inc. Prior to that time, Mr. Leishman has held management
positions at other media companies including Conde Nast Publications, BPI
Communications, Inc., and Harcourt Brace and Company.
Officers serve until their successors are duly elected and qualified
in the next annual meeting.
Director Compensation
On August 17 of each year (or the first business day thereafter),
pursuant to our Non-Discretionary Directors Stock Option Plan, each director is
granted a five-year option to purchase 3,333 shares of our common stock at the
market price on the date of grant which is vested in full on the date of grant.
Except for these option grants, we have no established compensation arrangements
with our directors for their service as directors.
Directors' and Officers' Options
On August 17, 1993, the Board also adopted a Non-Discretionary
Directors Stock Option Plan pursuant to which up to 166,667 shares of common
stock may be granted to directors of NCI.
On August 17, 1993, the Board adopted a Discretionary Directors and
Officers Stock Option Plan pursuant to which the Board may award options to
purchase an aggregate of 500,000 shares of common stock to directors and
officers of NCI and its subsidiaries which shall be exercisable at the market
price on the date of grant for periods and under conditions specified by the
Board in such grants. The Discretionary Option Plan permits the granting of
non-qualified stock options.
On December 21, 1999, the Board adopted a 1999 Stock Incentive Plan
pursuant to which the Board may award options to purchase an aggregate of
200,000 shares of our common stock to directors, officers, employees and
consultants. Options under the 1999 Stock Incentive Plan may be non-qualified
options or incentive stock options for purposes of income taxation under Section
422 of the Internal Revenue Code of 1986. All qualified incentive stock options
granted under the plan must have an exercise price at least equal to Fair Market
Value (as defined in the plan) as of the grant date while non-qualified stock
options may be granted at an exercise price less than Fair Market Value.
Committees of the Board of Directors
The Board of Directors currently has three committees, the Executive
Committee, the Audit Committee and the Compensation Committee.
-14-
The Executive Committee consists of James A. Finkelstein, Wilbur L.
Ross, Jr. and Gary Weiss. Mr. Ross serves as Chairman of the Executive
Committee. During the year ended December 31, 2004, the Executive Committee did
not meet.
The Audit Committee consists of Martin Mendelsohn who is independent
within the meaning of Rule 10A-3(b) under The Securities Exchange Act of 1934.
The Audit Committee is governed by a written charter adopted by the Board of
Directors. The Audit Committee recommends the independent accountants appointed
by the Board of Directors to audit our financial statements, which includes an
inspection of our books and accounts, and reviews with such accountants the
scope of their audit and their report thereon, including any questions and
recommendations that may arise relating to such audit and report or our internal
accounting and auditing system procedures. Also, as further described below, the
Audit Committee reviews the financial statements with the accountants. The Audit
Committee does not have a Financial Expert, but rather relies on the knowledge
of the members of the Board of Directors, the officers of NCI, and its outside
accountants. During the year ended December 31, 2004, the Audit Committee had
four meetings.
The Compensation Committee consists of Jerry Finkelstein and Gary
Weiss. The function of the Compensation Committee is to review and approve the
compensation of executive officers and establish targets and incentive awards
under our incentive compensation plans. During the year ended December 31, 2004,
the Compensation Committee did not have any formal meetings.
The Board of Directors does not have a standing Nominating Committee.
The Board of Directors does not currently have a process for security holders to
send communications to the Board of Directors.
Other Information about our Board of Directors
Although we do not have a policy with regard to Board members'
attendance at our annual meetings of stockholders, all of the directors are
encouraged to attend such meetings.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its principal
executive officer and principal financial officer, a copy of which is filed as
an exhibit herewith.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors and persons who own more than ten percent of a registered
class of our equity securities to file reports of ownership and changes in
ownership with the SEC. Officers, directors and ten percent stockholders are
required by regulation to furnish us with copies of all Section 16(a) forms they
file. To the best of our knowledge (based upon a representation submitted by the
officers and directors of the Company and a review of the Forms 3, 4 and 5
filed), no officer, director or 10% beneficial stockholder failed to file on a
timely basis any reports required by Section 16(a) of the Securities Exchange
Act of 1934 during the year ended December 31, 2004.
Item 10. Executive Compensation.
EMPLOYMENT AGREEMENTS
On May 8, 2001 NCI entered into a Letter Agreement with James A.
Finkelstein pursuant to which Mr. Finkelstein is employed as President and Chief
Executive Officer, of NCI, for no definitive term. Mr. Finkelstein's employment
commenced on June 4, 2001 at an annual salary of $150,000. In January 2003, the
Board of Directors granted Mr. Finkelstein an increase in salary of $100,000 to
an annual salary of $250,000 effective January 1, 2003. Mr. Finkelstein's salary
also increases on the first day of each calendar year by not less than 5%. The
Board also granted Mr. Finkelstein a bonus of $25,000 for the year ended
December 31, 2002, that
-15-
because of cash constraints of NCI was paid in 2004. In addition to his base
salary, we provide Mr. Finkelstein with medical and certain other benefits.
Mr. Jerry Finkelstein was employed as Chairman of the Board of
Directors under a written employment agreement which terminated on August 19,
2003.
The following table and footnotes discuss the compensation paid in
2004, 2003, and 2002 to (i) our Chief Executive Officer and (ii) the other
executive officers:
Summary Compensation Table
-------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
-------------------------------------------------------------------------------------------------------------
Restricted Securities
Annual Annual Stock Other Annual Underlying
Name and Principal Fiscal Salary Bonus Awards Compensation Options All Other
Position Year ($) (1) ($) ($) ($) (#) Compensation
-------------------------------------------------------------------------------------------------------------
James A. Finkelstein, 2004 $278,644 -- -- -- 3,333 --
President and 2003 $265,375 -- -- -- 3,333 --
Chief Executive 2002 $157,500 $25,000 -- -- 3,333 --
Officer (1)
-------------------------------------------------------------------------------------------------------------
E. Paul Leishman, Chief 2004 $148,000 $10,000 -- -- -- --
Financial Officer 2003 $139,842 $10,000 -- -- -- --
& Secretary 2002 $128,365 $10,000 -- -- -- --
-------------------------------------------------------------------------------------------------------------
Jerry Finkelstein, 2004 $ 25,000 -- -- -- 3,333 --
Chairman of the 2003 $ 79,293 -- -- -- 3,333 --
Board of Directors 2002 $ 95,000 -- -- -- 3,333 --
and Director
-------------------------------------------------------------------------------------------------------------
Daniel Rattiner, Editor 2004 $181,064 $31,080 -- -- -- --
and Publisher of 2003 $175,711 $53,366 -- -- -- --
Dan's Papers 2002 $172,330 $68,820 -- -- -- --
-------------------------------------------------------------------------------------------------------------
Hugo Gurdon, Editor in 2004 $213,846 -- -- -- -- --
Chief of The Hill 2003 $202,307 -- -- -- -- --
2002 -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------
(1) Includes some compensation accrued but not paid during each applicable
year.
Options Grants in Last Fiscal Year
-16-
The following table sets forth the stock options granted to the
executive officers named in the Summary Compensation Table during the year 2004,
pursuant to NCI's stock option plans.
-----------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted to
Underlying Employees In Exercise or
Options (1) Fiscal Year Base Price Expiration Grant Date
Name (#) (%) ($/Sh) Date Value (2)
-----------------------------------------------------------------------------------------------
James A. Finkelstein 3,333 50.0 $1.00 08/17/09 $1,087
-----------------------------------------------------------------------------------------------
Jerry Finkelstein 3,333 50.0 $1.00 08/17/09 $1,087
-----------------------------------------------------------------------------------------------
(1) These awards were granted on August 17, 2004 pursuant to News
Communications, Inc. Non-Discretionary Directors Stock Option Plan. The
options vest on date of grant and have a term of 5 years from the date of
grant.
(2) The fair value of each stock option, $0.3260, was estimated on the date of
the grant using the Black-Scholes option pricing model. The assumptions
were 28.49%, 3.87%, and 0% for the volatility, risk free yield and dividend
yield, respectively.
NCI used the same Black-Scholes calculation to determine the stock
option expense of $0.3260 per option stated in NCI's audited financial
statements for the year ended December 31, 2004.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
No options were exercised by the persons named in the Summary
Compensation Table for the year ended December 31, 2004 and no options were in
the money at December 31, 2004. The following table sets forth, with respect to
the persons named in the Summary Compensation Table, information concerning the
securities underlying unexercised options, all of which were exercisable. No
options were exercised and none of the options were in-the-money at December 31,
2004.
-------------------------------------------------------------------
Securities
Shares Value Underlying
Acquired on Realized Unexercised Options
Name Exercise ($) Exercisable
-------------------------------------------------------------------
James A. Finkelstein -- 13,332 (1)
-------------------------------------------------------------------
Jerry Finkelstein -- 16,665 (1)
-------------------------------------------------------------------
(1) Includes stock options at exercise prices ranging from $0.79 to $1.00.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Pursuant to the terms of a Stockholders' Agreement dated May 8, 2001
by and among Jerry Finkelstein, The Finkelstein Foundation Inc., Shirley
Finkelstein, Melvyn I. Weiss, Wilbur L. Ross, Jr., M&B Weiss Family Partnership,
J. Morton Davis, D.H. Blair Investment Banking Corp., Rivkalex Corporation,
Rosalind Davidowitz and James A. Finkelstein, each of these stockholders have
agreed, for so long as James A. Finkelstein is employed by NCI, to vote their
shares to elect as directors of NCI: Four persons designated by James
Finkelstein; one person designated by J. Morton Davis, D.H. Blair Investment
Banking Corp., Rivkalex Corporation and Rosalind Davidowitz; one person
designated by Wilbur L. Ross, Jr.; and one person designated by Melvyn I. Weiss
and M&B
-17-
Weiss Family Partnership; two persons designated by mutual agreement of J.
Morton Davis, Melvyn I. Weiss, and Wilbur L. Ross., Jr..
Further, under the Stockholders' Agreement, Mr. Davis, D.H. Blair
Investment Banking Corp., Rivkalex Corporation and Rosalind Davidowitz have
granted James A. Finkelstein an irrevocable proxy to vote all of the shares
owned by them in favor of the proposals presented to the stockholders of NCI at
the annual meeting.
The following table sets forth certain information regarding
beneficial ownership of NCI's common stock, as of March 16, 2005, by each person
known to NCI to beneficially own more than 5% of NCI's outstanding common stock,
by each person who is a director of NCI, by each person listed in the Summary
Compensation Table and by all directors and officers of NCI as a group.
The information contained in the table was furnished by the persons
listed therein. The calculations of the percent of shares beneficially owned are
based on 12,682,931 shares of common stock outstanding as of March 16, 2005
plus, with respect to each such person, the number of additional shares that
will be outstanding upon the conversion by such person of outstanding shares of
our $10 Convertible Preferred Stock or upon the exercise of the warrants and
options exercisable within sixty (60) days set forth herein.
Name and Address Number of Shares Approximate
of Beneficial Owners and of Common Stock Percentage
Management Beneficially Owned of Class (1)
----------------------------------------- ------------------ ------------
James A. Finkelstein 8,240,653 (1) 54.17%
Two Park Avenue, Suite 1405
New York, NY 10016
Hollinger NCI Holdings LLC 4,168,445 (2) 27.47%
712 Fifth Avenue
New York, NY 10019
Martin A. Bell 16,665 (3)(8) *
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, NY 10005
J. Morton Davis 4,074,875 (5) (7) 32.92%
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, NY 10005
Jerry Finkelstein 280,666 (3)(4) 2.33%
35 East 76th Street
New York, NY 10021
-18-
Name and Address Number of Shares Approximate
of Beneficial Owners and of Common Stock Percentage
Management Beneficially Owned of Class (1)
----------------------------------------- ------------------ ------------
Martin Mendelsohn 16,665 (3) *
Schnader Harrison Segal, & Lewis
2001 Pennsylvania Avenue, NW Suite
300
Washington, D.C. 20006
Wilbur L. Ross, Jr. 614,964 (3)(5) 5.04%
101 E. 52nd Street, 19th Floor
New York, NY 10022
Gary Weiss 16,665 (3) *
Weiss Capital Group LLC
99 Seaview Blvd.
Port Washington, NY 11050
Melvyn I. Weiss 1,610,654 (5)(6) 13.30%
One Pennsylvania Plaza
New York, NY 10119
Rosalind Davidowitz 940,109 (9) 7.70%
c/o Rivkalex Corporation
44 Wall Street
New York, NY 10005
David Selengut 1,103,667 (10) 9.18%
Ellenoff Grossman & Schole LLP
370 Lexington Avenue
New York, NY 10017
Dov Perlysky 1,171,950 (11) 9.49%
2 Lakeside Drive West
Lawrence, NY 11559
Matthew Doull 9,999 (3) *
Hollinger International, Inc.
712 Fifth Avenue
New York, NY 10019
E. Paul Leishman 0 *
Two Park Avenue, Suite 1405
New York, NY 10016
All Directors and Executive Officers as a 8,932,276 (12) 57.72%
Group (9 persons)
----------
* Less than one percent.
-19-
(1) Includes (i) 50,000 shares of common stock directly owned by Mr.
Finkelstein, (ii) 1,018,445 shares of common stock and 3,150,000 shares of
common stock issuable upon the exercise of warrants owned by JAF-HLR, LLC
("JAF-HLR"), in which Mr. Finkelstein owns a 50% interest; (iii) options to
purchase 13,332 shares of common stock; (iv) 3,983,816 shares of common
stock owned by J. Morton Davis and his affiliates (the "Davis Group") and
Jerry Finkelstein and his affiliates (the "Finkelstein Group") and 25,060
shares of common stock currently issuable upon conversion of 5,900 shares
of $10 Convertible Preferred Stock owned by the Davis Group, the voting
rights of which have been transferred to Mr. Finkelstein. Beneficial
ownership of one half of the shares and warrants set forth in clause (ii)
above and all of the shares and warrants referenced in clauses (iv) above
is disclaimed.
(2) Includes 1,018,445 shares of common stock and 3,150,000 shares of common
stock issuable upon the exercise of options and warrants owned by JAF-HLR,
in which Hollinger-NCI Holdings LLC owns a 50% interest. Beneficial
ownership of one half of the shares and warrants held by JAF-HLR is
disclaimed.
(3) Includes the following numbers of shares purchasable upon the exercise of
presently exercisable options : Mr. Bell--16,665; Mr. Jerry
Finkelstein--16,665; Mr. Mendelsohn--16,665; Mr. Ross--16,665; Mr. G.
Weiss--16,665; Mr. Doull--9,999.
(4) Includes
(a) 9,945 shares owned by The Jerry Finkelstein Foundation, Inc., of which
Jerry Finkelstein is President, and
(b) 66,667 shares owned by The Estate of Shirley Finkelstein, of which
Jerry Finkelstein is executor.
(5) Includes the following numbers of shares issuable upon conversion of shares
of $10 Convertible Preferred Stock: Davis Group--25,060; Mr. Ross--169,900;
Mr. M. Weiss--84,950.
(6) Includes 457,304 shares owned by the M&B Weiss Family Limited Partnership.
(7) Includes
(a) 2,830,129 shares of common stock owned by D.H. Blair Investment
Banking Corp., of which J. Morton Davis is a Director and the sole
stockholder;
(b) 150,000 shares of common stock issuable upon the exercise of warrants
owned by D.H. Blair Investment Banking Corp., of which J. Morton Davis
is a Director and the sole stockholder;
(c) 129,567 shares owned directly by Mr. Davis; and
(d) 25,060 shares of common stock issuable upon exercise of 5,900 shares
of $10 Convertible Preferred Stock.
(e) 48,476 shares owned by Rivkalex Corporation ("Rivkalex"), a private
corporation owned by Rosalind Davidowitz, Mr. Davis's wife;
(f) 711,633 shares of common stock owned by Rosalind Davidowitz. Mr. Davis
and D.H. Blair Investment Banking Corp. expressly disclaim beneficial
ownership of all securities held by Rivkalex and Rosalind Davidowitz,
and
(g) 180,000 shares of common stock to be issued upon conversion of 8%
Convertible Notes owned by Rosalind Davidowitz.
(8) Does not include 2,830,129 shares of common stock, warrants to purchase
150,000 shares of common stock or 25,060 shares of common stock issuable
upon conversion of $10 Convertible Preferred Stock owned by D.H. Blair
Investment Banking Corp., of which Martin A. Bell is Vice Chairman. Mr.
Bell expressly disclaims beneficial ownership of all securities held by
D.H. Blair Investment Banking Corp.
(9) Includes 711,633 share of common stock owned by Ms. Davidowitz, 48,476
shares owned by Rivkalex and 180,000 shares of common stock to be issued
upon conversion of an 8% Convertible Note owned by Ms. Davidowitz.
Does not include
(a) 2,830,129 shares of common stock owned by D.H. Blair Investment
Banking Corp., of which J. Morton Davis is a Director and the sole
stockholder;
(b) 150,000 shares of common stock issuable upon the exercise of warrants
owned by D.H. Blair Investment Banking Corp., of which J. Morton Davis
is a Director and the sole stockholder;
(c) 129,567 shares owned directly by Mr. Davis; and
(d) 25,060 shares of common stock issuable upon conversion of 5,900 shares
of $10 Convertible Preferred Stock.
(10) Consists of 1,103,667 shares of common stock owned by Venturetek LP in
which Mr. Selengut is the beneficial owner.
(11) Includes:
(a) 581,950 shares of common stock;
-20-
(b) 270,000 shares of common stock owned by Kinder Investments LP
("Kinder"), of which Mr. Perlysky is the sole member of the general
partner of Kinder.
(c) 320,000 shares of common stock to be issued upon conversion of 8%
Convertible Notes owned by Dov Perlysky.
(12) Includes shares of common stock issuable upon exercise of the options
referenced in (1), (2) and (3) above, shares issuable upon the conversion
of the $10 Convertible Preferred Stock referenced in (5) above and shares
issuable upon the exercise of the warrants in (1) above.
Equity Compensation Plan Information
----------------------------------------------------------------------------------------------------------
(a) (b) (c)
----------------------------------------------------------------------------------------------------------
Plan category Number of securities Weighted-average Number of securities
to the issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under equity
outstanding options, warrants and rights compensation plans (excluding
warrants and rights securities reflected in
column (a))
----------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by stock 0 0 0
holders
----------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by 174,820 $1.032 693,513
stockholders
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Total 174,820 $1.032 693,513
----------------------------------------------------------------------------------------------------------
Directors and Officers Stock Option Plan - On August 17, 1993, the
Board of Directors adopted a Discretionary Directors and Officers Stock Option
Plan as amended (the "Discretionary Option Plan") pursuant to which the Board
may award options to purchase an aggregate of 500,000 shares of common stock to
directors and officers of the Company and its subsidiaries which shall be
exercisable at the market price on the date of grant for periods (generally five
years) and, under certain conditions, a time period specified by the Board in
such grants. Options under the Discretionary Option Plan are nonqualified and
non-incentive options for purposes of income taxation and are not intended to
qualify under Section 422A of the Internal Revenue Code of 1986. No grants were
made under the Discretionary Option Plan during the fiscal year ended December
31, 2004.
On August 17, 1993, the Board also adopted a Non-Discretionary
Directors Stock Option Plan (the "Non-Discretionary Option Plan") pursuant to
which each director will be granted, on August 17, 1993 and each anniversary
thereof on which he or she continues to be a director, a five year option to
purchase 3,333 shares of common stock at the market price on the date of the
grant. Under this plan, a maximum of 40,013 shares of common stock is available
for issuance. The Non-Discretionary Option Plan also provides that any person
becoming a director within the six months after any August 17 will be granted
options. On August 17, 2004, options to purchase 23,331 shares of common stock
were granted at an exercise price of $1.00 per share and a fair market value of
$0.3260 per share. With an exercise price per share ranging from $0.79 to $7.88,
the weighted average exercise price at December 31, 2004 was $0.919.
1999 Stock Option Plan - The Company has a stock option plan (the
"1999 Plan") pursuant to which it has reserved authorized, but unissued, shares
of common stock for issuance of both qualified incentive stock options and
nonqualified stock options to employees, officers and directors of the Company
and other individuals providing services to or for the Company. Under the Plan,
a maximum of 153,500 shares of common stock are available for issuance. The
option price will be the fair market value as defined by the Plan. Generally,
options may be exercised commencing two years from the date of grant and
terminating ten years from the date of grant. In June 2000, the Company entered
into stock option agreements with certain employees for options to purchase
136,000 shares of common stock at an exercise price of $1.188 per share, which
represented the fair market value on the date of the grant. The options vested
in June 2002. In November 2000, the Company entered into a stock option
agreement with a consultant for options to purchase 18,000 shares of common
stock at an exercise price of $1.00 per share. The options vested immediately.
With an exercise price per share ranging from $1.00 to $1.19, the weighted
average exercise price at December 31, 2004 $1.11.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain office facilities of NCI's subsidiary, Dan's Papers, Inc. have
been leased since 1988 from Dan Rattiner, an officer and former stockholder of
Dan's Papers, Inc. Rental expense amounted to approximately $81,800 and $81,600
for the years ended December 31, 2004 and 2003, respectively. The lease payment
is adjusted annually based on the Consumer Price Index. The lease term is for
ten years with a renewal option of five years. The original lease term expires
on October 31, 2008.
On February 3, 2005, pursuant to a Subscription Agreement with D.H.
Blair Investment Banking Corp., we satisfied $200,000 of our 8% convertible note
plus accrued interest thereon of $61,150 by issuing 375,139 shares of common
stock at a price of $0.70 per share.
-21-
On November 27, 2002, pursuant to the terms of a Letter Agreement by
and between Daniel Rattiner and NCI, Mr. Rattiner, the publisher of Dan's
Papers, exercised his option to require NCI to purchase shares of common stock
of Dan's Papers, Inc (the "Put Shares") which NCI did not already own. NCI
purchased the Put Shares for a total of $1,600,000, of which $400,000 was paid
at closing on November 27, 2002. The balance of the purchase price is due, with
interest at a rate of prime plus one percent, in two equal installments on the
first and second anniversaries of the closing. Payment of the first installment
was made by NCI. Pursuant to a Letter Agreement the due date of the second
installment was amended to provide payment in two equal installments on November
29, 2004 and on November 28, 2005. The Company paid the November 2004
installment of $300,000, plus accrued interest of $34,346, in January 2005,
without violating the terms of the Company's agreement with the minority
stockholder. The second installment due on November 28, 2005, plus interest at
8% per annum can be paid in 2006 without violating the terms of the agreement
with the minority stockholder.
On December 11, 2002, the former Editor-in-Chief and Publisher of The
Hill, concurrent with his resignation, exercised an option to liquidate and
cash-out a phantom equity interest in The Hill, that was granted to him upon the
start-up and launch of The Hill in 1994. Under the terms of his agreement, the
amount owed to him was $224,922. This included the phantom equity interest,
accrued bonus and vacation, plus interest at 8%. $112,461 of the amount due was
paid in April and May 2003 and the $112,461 balance was paid in May 2004.
The transactions described above are on terms as favorable to NCI as
those that could have been obtained from independent third parties and
arms-length negotiations.
Item 14. Principal Accountant Fees and Services
Audit Fees - BDO Seidman, LLP is NCI's principal independent auditor.
The aggregate fees billed or to be billed by BDO Seidman, LLP for each of the
last two fiscal years for professional services rendered for our annual audit,
review of financial statements included in our quarterly reports on Form 10-QSB
and review of the documents filed with the SEC were $94,000 for 2004 and $87,000
for 2003.
Audit-Related Fees - The aggregate fees billed or to be billed by BDO
Seidman, LLP for each of the last two fiscal years for assurance and related
services that were reasonably related to the audit of the NCI 401(k) Retirement
Savings Plan were $10,500 for 2004 and 2003. The nature of the services
performed for these fees included services in connection with proposed and
consummated dispositions of businesses.
Tax Fees - The aggregate fees billed by BDO Seidman, LLP in each of
the last two fiscal years for professional services rendered for tax compliance,
tax advice and tax planning were $17,000 for 2004 and $28,800 for 2003.
All Other Fees - We did not make any other payment to BDO Seidman, LLP
during 2004 and 2003.
The Audit Committee's policy is to pre-approve all audit and
permissable non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, tax services and
other services. The Audit Committee may pre-approve particular services on a
case-by-case basis.
Item 14. Exhibits, List and Reports on Form 8-K.
(a) Exhibits
Incorporated by Exhibit No. in
Exhibit Reference from Referenced
Number Description Document (1) Document
3.1 Articles of Incorporation of the company (formerly known as Applied A 3.1
Resources, Inc.), filed with the Secretary of State of the State of
Nevada on May 20, 1986.
3.1.1 Certificate of Amendment of the Articles of Incorporation of the A 3.1.1
company, filed with the Secretary of State of the State of Nevada on
December 8, 1987.
3.1.2 Certificate of Amendment of the Articles of Incorporation of the B 3.1.2
company, filed with the Secretary of State of Nevada on August 16,
1990.
3.1.3 Certificate of Amendment of the Articles of Incorporation of the C 3.1.3
company, filed with the Secretary of the State of Nevada on July 26,
1994.
3.2 By-Laws of the company (as amended and restated). C 3.2.1
4.1 Form of Common Stock Certificate. B 4.1
4.2 Certificate of Designation of 10% Convertible Preferred Stock. Q 4.2
4.3 Certificate of Designation of 8% Convertible Preferred Stock. Q 4.2.1
4.31 Certificate of Amendment of Certificate of Designation of 8% Q 4.2.2
Convertible Preferred Stock.
-22-
4.4 Certificate of Designation of $10 Convertible Preferred Stock H 10.33
(included as part of Exhibit 10.21).
10.1 1999 Stock Option Plan. Q 10.2
10.2 Discretionary Directors and Officers Stock Option Plan. C 10.2.1
10.3 Non-discretionary Directors Stock Option Plan. C 10.2.2
10.4 Agreement of Lease, dated October 31, 1988, by and between Daniel D 2.4
Rattiner and DP Acquisition Corp., for premises located on Montauk
Highway, Bridgehampton, New York.
10.5 Amendment of Lease, dated October 31, 1998, by and between Dan's I 10.6
Paper's Inc. (f/k/a D.P. Acquisition, Inc.) and Daniel Rattiner.
10.6 Lease Agreement, dated November 3, 1999, by and between News L 10.10
Communications, Inc. and Two Park Company for premises located at 2
Park Avenue, New York, New York.
10.7 Lease Agreement, dated June 28, 1994, by and between 15th & H Street L 10.12
Associates and Capitol Hill Publishing Company, Inc. for premises
located at 733 15th Street, N.W., Washington, D.C.
10.8 Letter Agreement, dated June 15, 1990, by and between Dan's Papers, B 10.21
Inc. and Dan's Papers, Ltd.
10.9 Employment and Stockholders' Agreement dated as of November 25, 1997 H 10.4.5
by and between News Communications, Inc. and Daniel Rattiner.
10.10 Form of Subscription Agreement made as of October 4, 1996 by and among F 10.33
News Communications, Inc. and persons designated therein as
"Purchasers," including Exhibit 1 thereto, form of Certificate of
Designation of $10.00 Convertible Preferred Stock, and Exhibit 2
thereto, form of Warrant.
10.11 Letter Agreement dated as of May 8, 2001 by and between News M 10.1
Communications, Inc. and James A. Finkelstein.
10.12 Stockholders' Agreement dated as of May 8, 2001 by and among Jerry M 10.2
Finkelstein, The Finkelstein Foundation, Inc., Shirley Finkelstein,
Wilbur L. Ross, Jr.; Melvyn I. Weiss, M&B Weiss Family Partnership, J.
Morton Davis, D.H. Blair Investment Banking Corp., Rivkalex
Corporation, Rosalind Davidowitz, and James Finkelstein.
10.13 Warrant to purchase 1,000,000 shares of common stock of News M 10.7
Communications, Inc. at $1.10 per share issued to James A.
Finkelstein.
-23-
10.14 Warrant to purchase 1,000,000 shares of common stock of News M 10.8
Communications, Inc. at $1.50 per share, dated as of May 8, 2001 and
issued to James A. Finkelstein.
10.15 Warrant to purchase 1,000,000 shares of common stock of News M 10.9
Communications, Inc. at $2.00 per share, dated as of May 8, 2001 and
issued to James A. Finkelstein.
10.16 Warrant to purchase 150,000 shares of common stock of News M 10.11
Communications, Inc. at $1.00 per share, dated June 4, 2001 and issued
to D.H. Blair Investment Banking Corp.
10.17 Warrant to purchase 150,000 shares of common stock of News M 10.12
Communications, Inc. at $1.00 per share, dated June 4, 2001 and issued
to James A. Finkelstein.
10.18 Letter Agreement dated as of November 27, 2002 by and between News P 10.42
Communications, Inc. and Daniel Rattiner for the sale of 20 shares of
common stock of Dan's Papers, Inc.
10.19 Form of Subscription Agreement on the dates designated therein by and Q 10.41
between News Communications, Inc., and person(s) designated therein as
"Purchaser(s)" for the amounts designated therein.
10.20 Agreement dated as of September 30, 2003 by and between News Q 2.0
Communications, Inc. and World Business Media LLC for the sale of
substantially all of the assets and liabilities of GSN: Government
Security News.
10.21 Letter Agreement dated as of February 3, 2005 by and between News *
Communications, Inc. and D.H. Blair Investment Banking Corp for the
conversion of an 8% Convertible Note in the amount of $200,000 plus
accrued interest of $62,597 at a conversion price of $0.70 per share
into 375,139 shares of common stock.
11 Statement re: computation of per share earnings
14 Code of Ethics *
21 Subsidiaries of News Communications, Inc. *
31.1 Certification of Chief Executive Officer pursuant to Section 302 of *
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of *
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of *
the Sarbanes-Oxley Act of 2002
-24-
32.2 Certification of Chief Financial Officer pursuant to Section 906 of *
the Sarbanes-Oxley Act of 2002
Notes:
A Annual Report of the company on Form 10-K for the year ended November 30,
1987.
B Registration Statement of the company on Form S-1, No. 33-35484.
C Registration Statement of the company on Form S-1, No. 33-46467.
D Current Report of the company on Form 8-K relating to events occurring on
October 31, 1988.
E Annual Report of the company on Form 10-KSB for the year ended November 30,
1995.
F Quarterly Report of the company on Form 10-QSB for the quarter ended August
31, 1996.
G Annual Report of the company on Form 10-KSB/A for the year ended November
30, 1996.
H Annual Report of the company on Form 10-KSB for the year ended November 30,
1997.
I Registration Statement on Form SB-2 (Registration No. 333-67407), declared
effective by the SEC on January 14, 1999.
J Current Report of the company on Form 8-K relating to events occurring on
July 28, 1999.
K Annual Report of the company on Form 10-KSB for the year ended November 30,
1999.
L Annual Report of the company on Form 10-KSB for the year ended December 31,
2000.
M Current Report of the company on Form 8-K relating to events occurring on
June 4, 2001.
N Quarterly Report of the company on Form 10-QSB for the quarter ended June
30, 2001.
O Current Report of the company on Form 8-K relating to events occurring on
November 11, 2002.
P Annual Report of the company on Form 10-KSB for the year ended December 31,
2002.
Q Annual Report of the company on Form 10-KSB for the year ended December 31,
2003.
----------
* Filed herewith.
-25-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: April 14, 2005
NEWS COMMUNICATIONS, INC.
By: /s/ James A. Finkelstein
------------------------------------
James A. Finkelstein
President & Chief Executive Officer
By: /s/ E. Paul Leishman
------------------------------------
E. Paul Leishman
Chief Financial Officer & Secretary
In accordance with the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ James A. Finkelstein
------------------------
James A. Finkelstein President & Chief Executive Officer April 14, 2005
/s/ E. Paul Leishman
-----------------------
E. Paul Leishman Chief Financial Officer & Secretary April 14, 2005
/s/ Jerry Finkelstein
-----------------------
Jerry Finkelstein Chairman of the Board & Director April 14, 2005
/s/ Wilbur L. Ross, Jr.
-----------------------
Wilbur L. Ross, Jr. Director April 14, 2005
/s/ Martin A. Bell
-----------------------
Martin A. Bell Director April 14, 2005
/s/ Gary Weiss
-----------------------
Gary Weiss Director April 14, 2005
/s/ Martin Mendelsohn
-----------------------
Martin Mendelsohn Director April 14, 2005
/s/ Matthew Doull
-----------------------
Matthew Doull Director April 14, 2005
-26-
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Contents
--------------------------------------------------------------------------------
Report of Independent Registered Public Accounting
Firm F-2
Consolidated financial statements:
Balance sheet F-3
Statements of operations F-4
Statements of stockholders' equity (deficit) F-5
Statements of cash flows F-6
Notes to consolidated financial statements F-7-19
F-1
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
--------------------------------------------------------------------------------
Board of Directors and Stockholders of
News Communications, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of News
Communications, Inc. and Subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on those financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of News Communications,
Inc. and Subsidiaries as of December 31, 2004, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
BDO Seidman, LLP
New York, NY
March 18, 2005
F-2
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Balance Sheet
--------------------------------------------------------------------------------
December 31, 2004
=====================================================================================================
Assets
Current:
Cash and cash equivalents $ 421,255
Accounts receivable - net of allowance for doubtful accounts of $229,022 1,015,297
Notes receivable 10,000
Other 218,231
-----------------------------------------------------------------------------------------------------
Total current assets 1,664,783
Restricted cash 34,102
Notes receivable, net of current portion 80,000
Property and equipment at cost- net 243,904
Goodwill 314,809
Trade names, net 462,612
Other - net 23,526
-----------------------------------------------------------------------------------------------------
Total assets $ 2,823,736
=====================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 787,994
Accrued expenses 1,167,003
Income taxes payable 10,077
Notes payable and capital leases, current portion 18,752
Unearned revenue 528,900
Due to related parties 631,418
-----------------------------------------------------------------------------------------------------
Total current liabilities 3,144,144
Due to related parties 261,150
Notes payable and capital leases, net of current portion 39,394
-----------------------------------------------------------------------------------------------------
Total liabilities 3,444,688
-----------------------------------------------------------------------------------------------------
Commitments
-----------------------------------------------------------------------------------------------------
Stockholders' equity (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; 12,307,792 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 (28,674,221)
-----------------------------------------------------------------------------------------------------
280,777
Less: Treasury stock, (658,334 common shares) - at cost (901,729)
-----------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (620,952)
-----------------------------------------------------------------------------------------------------
Total liabilities and equity (deficit) $ 2,823,736
=====================================================================================================
See accompanying notes to consolidated financial statements.
F-3
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Operations
--------------------------------------------------------------------------------
Years ended December 31, 2004 2003
---------------------------------------------------------------------------------
Net revenues $12,168,133 $10,230,081
---------------------------------------------------------------------------------
Expenses:
Editorial 2,055,657 1,915,575
Production and distribution 3,634,043 2,976,681
Selling 3,477,260 2,804,661
General and administrative 3,772,449 3,680,151
Depreciation and amortization 189,280 191,671
---------------------------------------------------------------------------------
Total expenses 13,128,689 11,568,739
Loss from operations, before gain on sale of
publication (960,556) (1,338,658)
Gain on sale of publication - 67,575
---------------------------------------------------------------------------------
Loss from operations (960,556) (1,271,083)
Interest expense, net (56,746) (38,657)
---------------------------------------------------------------------------------
Loss before provision for income taxes (1,017,302) (1,309,740)
Provision for income taxes 44,506 23,176
---------------------------------------------------------------------------------
Net loss $(1,061,808) $(1,332,916)
=================================================================================
Less: preferred dividends $ 39,438 $ 1,128
---------------------------------------------------------------------------------
Net loss available for common stockholders $(1,101,246) $(1,334,044)
Loss per common share:
Basic and diluted $ (0.09) $ (0.13)
---------------------------------------------------------------------------------
Weighted-average number of common shares outstanding:
Basic and diluted 11,643,103 10,479,689
---------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity (Deficit)
--------------------------------------------------------------------------------
Years ended December 31, 2004 and 2003
===============================================================================================
Preferred stock Common stock
---------------------------------- -------------------------------------
Shares Amount Paid-in capital Shares Amount Paid-in capital
---------------------------------- -------------------------------------
Balance,
December 31, 2002 192,534 $192,534 $1,703,345 10,844,744 $108,447 $25,550,672
Conversion of 10,005
shares of
preferred stock
into 3,000 shares
of common stock (10,005) (10,005) (90,025) 42,281 423 99,607
Issuance of
1,400,000 shares
of common stock 1,400,000 14,000 1,386,000
Dividends on
preferred stock
Net loss
-----------------------------------------------------------------------------------------------
Balance,
December 31, 2003 182,529 $182,529 $1,613,320 12,287,025 $122,870 $27,036,279
-----------------------------------------------------------------------------------------------
Conversion of 5,000
shares of $10
preferred stock
into 20,767
shares of common
stock (5,000) (5,000) (45,000) 20,767 208 49,792
Dividends on
preferred stock
Net loss
-----------------------------------------------------------------------------------------------
Balance,
December 31, 2004 177,529 $177,529 $1,568,320 12,307,792 $123,078 $27,086,071
===============================================================================================
Total
Treasury stockholders'
Deficit Stock equity (deficit)
-----------------------------------------
Balance,
December 31, 2002 $(26,238,931) $(901,729) $ 414,338
Conversion of 10,005
shares of
preferred stock
into 3,000 shares
of common stock - - -
Issuance of
1,400,000 shares
of common stock - - 1,400,000
Dividends on
preferred stock (1,128) (1,128)
Net loss (1,332,916) (1,332,916)
---------------------------------------------------------------
Balance,
December 31, 2003 $(27,572,975) $(901,729) $ 480,294
---------------------------------------------------------------
Conversion of 5,000
shares of $10
preferred stock
into 20,767
shares of common
stock - - -
Dividends on
preferred stock (39,438) (39,438)
Net loss (1,061,808) (1,061,808)
---------------------------------------------------------------
Balance,
December 31, 2004 $(28,674,221) $(901,729) $ (620,952)
===============================================================
See accompanying notes to consolidated financial statements
F-5
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
Years ended December 31, 2004 2003
======================================================================================
Cash flows from operating activities:
Net loss $(1,061,808) $(1,332,916)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 189,280 191,671
Provision for doubtful accounts 39,100 103,800
Gain on sale of publication - (67,575)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (101,236) (585,225)
Other current assets (17,556) (1,368)
Other assets (7,380) 6,201
Increase (decrease) in:
Accounts payable and accrued expenses (144,165) 716,323
Income taxes payable 10,077 (17,235)
Other liabilities 366,853 83,198
Related party payable 47,396 83,867
-------------------------------------------------------------------------------------
Net cash used in operating activities $ (679,439) $ (819,259)
-------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (53,508) (53,108)
Proceeds from sale of publication - 25,000
Collection of notes receivable 846,000 205,200
-------------------------------------------------------------------------------------
Net cash from investing activities $ 792,492 $ 177,092
-------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock - 1,400,000
Payment of related party notes payable (786,370) (112,461)
Dividends on preferred stock (39,438) (1,128)
Payments of note payable and capital lease obligations (32,885) (29,825)
-------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ (858,693) $ 1,256,586
-------------------------------------------------------------------------------------
Net Increase (decrease) in cash (745,640) 614,419
Cash, beginning of year 1,166,895 552,476
-------------------------------------------------------------------------------------
Cash, end of year $ 421,255 $ 1,166,895
=====================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 100,432 $ 13,819
Income taxes 28,524 27,311
Non-cash activities:
Purchases of equipment under capital leases - 34,309
Purchase of automobile - debt incurred - 22,454
Disposition of assets - notes received - 100,000
Conversion of preferred stock into common stock 50,000 100,030
=====================================================================================
See accompanying notes to consolidated financial statements.
F-6
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. Organization and Industry Segment
Description of Business - News Communications, Inc., a Nevada corporation,
through its subsidiaries, publishes and distributes advertiser-supported
newspapers and magazines. The Company's publishing subsidiaries are Dan's
Papers, Inc. ("DPI") and Capitol Hill Publishing Corp. ("Capitol Hill").
News Communications, Inc. and Subsidiaries ("NCI", or the "Company")
function in one industry segment, which is the news publication business.
The Company has negative working capital for the year ended December 31,
2004. Although the Company expects cash generated from subsidiaries will
largely continue to finance its operations, the Company has an obligation
of $300,000, plus accrued interest, due on November 28, 2005, as more fully
discussed in Note 5. The Company's continuation as a going concern may be
dependent upon its ability to generate sufficient cash flow to meet its
obligation. Management is currently evaluating methods for additional
financing which will allow it to make timely payment on the obligation. The
Company's financial statements do not include any adjustments that might
adjust from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of the parent company and its subsidiaries.
All intercompany accounts and transactions have been eliminated.
Fair Value of Financial Instruments - The carrying amounts reported in the
consolidated balance sheet for cash, accounts receivable and accounts
payable approximate fair value because of the immediate or short-term
maturity of these financial instruments. It is not practical to determine
the fair value of the debt to related parties.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Estimates have been made by management with respect to the
Company's allowance for doubtful accounts, amortization relating to trade
names, and other items. Actual results could differ from those amounts.
Cash and Cash Equivalents - We consider all highly-liquid debt instruments
and other short-term investments with an original maturity of three months
or less to be cash equivalents.
Allowance for Doubtful Accounts - Senior management reviews accounts
receivable on a monthly basis to determine if any receivables will
potentially be uncollectible. The Company includes any accounts receivable
balances that are determined to be uncollectible, along with a general
reserve based on certain percentages of the aged receivables, in the
overall allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the
allowance.
Property and Equipment - All expenditures for betterments and additions are
capitalized. Expenditures for normal repairs and maintenance are charged
against income as incurred. Depreciation and amortization are provided for
financial reporting purposes on the basis of various estimated useful lives
of the assets, using the straight-line method as follows:
Years
------------------------------------------------------------------------------
Furniture, fixtures, and office equipment 5 - 10
Leasehold improvements Shorter of useful life of asset or
length of lease
Computer equipment 5
Distribution boxes 5
------------------------------------------------------------------------------
F-7
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Intangibles - Intangibles represent acquisition costs in excess of the fair
value of net tangible assets of businesses purchased and consist primarily
of trade names and goodwill. Trade names are being amortized over twenty
years on a straight-line basis. Prior to January 1, 2002, goodwill was
amortized on a straight-line basis over twenty years. On January 1, 2002,
the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") and suspended
the amortization of goodwill. Goodwill has not been amortized, but instead
is now evaluated for impairment. See Notes 4 and 5 for the impact of the
adoption of SFAS 142.
Long-Lived Assets - Long-lived assets, such as trade names and property and
equipment, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the
use of these assets. When any such impairment exists, the related assets
will be written down to fair value. This relates to DPI which has
historically generated operating profits and cash flow from operations. See
Notes 4 and 5. No impairment losses have been necessary through December
31, 2004.
Revenue Recognition - Advertising revenues are earned when advertisements
appear in the various publications. Unearned revenues of $528,900 at
December 31, 2004, represent future advertisements that have been paid for
by customers in advance.
Seasonality - Three of the Company's publications (which generated
approximately 59% of revenues for the year ended December 31, 2004 and
approximately 57% for the year ended December 31, 2003) are published in a
resort-area of New York that earns a significant portion of its revenue
during the summer months.
Shipping and Handling Costs - Shipping and handling costs billed to
customers are recorded as revenue and are immaterial. The costs associated
with shipping goods to customers are recorded as an operating expense.
Concentration of Customers - The majority of the Company's customers are
located in the Washington, D.C. and Eastern Long Island, N.Y. areas.
Concentrations of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk are cash and accounts
receivable arising from its normal business activities. The Company
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk of its customers, establishes an
allowance for uncollectible accounts and, as a consequence, believes that
its accounts receivable credit risk exposure beyond such allowance is
limited. The Company places its cash with high credit quality financial
institutions. The Company has not experienced any losses with financial
institutions. The amount on deposit in any one institution that exceeds
federally insured limits is subject to credit risk. As of December 31,
2004, the Company had no funds with financial institutions subject to a
credit risk beyond the insured amount.
Loss Per Common Share - Basic loss per share includes no dilution and is
computed by dividing loss available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted loss
per share reflects the potential dilution from the assumed exercise of
stock options, warrants and conversion of preferred stock. Common stock
equivalents were not included in the calculations in 2004 or 2003 since
their effects were anti-dilutive. Accordingly, basic and dilutive earnings
per share did not differ for the years ended December 31, 2004 and December
31, 2003.
For the years ended December 31, 2004 and 2003, options to purchase 219,821
and 768,153 shares of common stock, warrants to purchase 3,315,873 and
3,315,873 shares of common stock, convertible preferred shares convertible
into 767,376 and 771,461 shares of common stock, and convertible notes
convertible into 261,150 and 245,172 shares of common stock,
F-8
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
respectively, were not included in the computation of diluted loss per
share because the effect would be anti-dilutive.
Income Taxes - Income taxes are calculated using the liability method
specified by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109, requires a company to
recognize deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in a company's financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation
allowance to the extent realization is uncertain.
Accounting for Stock-Based Compensation - The Company has chosen to account
for stock-based compensation to employees and non-employee members of the
Board using the intrinsic value method prescribed by Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations. As required by SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has
presented certain pro forma and other disclosures related to stock-based
compensation plans. See Note 11 for disclosure of assumptions utilized in
the calculation of fair value.
In December 2002, the Financial Accounting Standards Board issued SFAS
No.148, Accounting for Stock-Based Compensation - Transition and
Disclosure," ("SFAS 148"), which provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require disclosure in both interim
and annual financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. SFAS 148 is effective for fiscal years ended after
December 15, 2002 and for interim financial statements beginning after
December 15, 2002. The Company plans to continue using the intrinsic value
method for stock-based compensation.
In accordance with SFAS 148, the following table illustrates the effect on
net loss and loss per share as if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation:
Years ended December 31, 2004 2003
=================================================================================
Net loss, as reported ($1,061,808) ($1,332,916)
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards (7,606) (8,213)
---------------------------------------------------------------------------------
Proforma net loss ($1,069,414) ($1,341,129)
---------------------------------------------------------------------------------
Basic net loss per share:
As reported (0.09) (0.13)
Proforma (0.09) (0.13)
=================================================================================
3. Property and Equipment
Major classes of property and equipment are as follows:
F-9
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
December 31, 2004
------------------------------------------------------------
Leasehold improvements $ 231,689
Computer equipment and software 555,461
Furniture, fixtures and office equipment 233,897
Automobile 45,538
Distribution boxes 17,021
------------------------------------------------------------
$1,083,606
Less: Accumulated depreciation and amortization 839,702
------------------------------------------------------------
Property and equipment, net $ 243,904
------------------------------------------------------------
Property and equipment included assets under capital leases at December 31,
2004 with a cost of $90,806 and accumulated depreciation of $61,717.
Depreciation expense for the years ended December 31, 2004 and 2003 was
$163,217 and $165,608, respectively.
4. Intangible Assets
Goodwill
As of January 1, 2002, the Company adopted SFAS 142 that requires, among
other things, that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS 142 requires
that the Company identify reporting units for the purposes of assessing
potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life.
As of December 31, 2004, the net carrying amount of goodwill is $314,809
which was recorded in connection with the acquisition of a minority
interest in September 2002 (see Note 5). As of December 31, 2004, the
Company completed its fair value-based goodwill impairment test which was
prepared on a discounted cash flow basis and resulted in no impairment loss
being recorded.
Trade names
Trade names are amortized on a straight-line basis over 20 years. The
Company recorded the trade names in connection with the acquisition of a
minority interest in September 2002 (see Note 5). Trade names and goodwill
as of December 31, 2004 consisted of:
December 31, 2004
-------------------------------------------
Trade names $521,253
Less: Accumulated amortization: (58,641)
-------------------------------------------
$462,612
-------------------------------------------
Amortization expense of $26,063 and $26,063 was recognized for the years
ended December 31, 2004 and December 31, 2003. Amortization expense for
each of the five succeeding years is estimated to be approximately $26,000
per year.
5. Related Parties
The Company expects to cover working capital needs; in the event of a
shortfall, a principal stockholder is committed, between April 15, 2005 and
April 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.
F-10
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
During March 2001, the Company received $200,000 in the form of an 8%
Convertible Note from principal stockholders of the Company. Principal and
interest are due on the earlier of (a) July 31, 2005, or (b) upon the next
round of equity financing and have a stated interest rate of 8% per annum.
As of December 31, 2004, accrued interest was $61,150. On February 3, 2005,
the Company discharged its obligations under the note, including accrued
interest by issuing 375,139 shares of common stock at a price of $0.70 per
share (see Note 16). Accordingly, the debt and accrued interest have been
classified as long-term at December 31, 2004.
On December 11, 2002, the former Editor-in-Chief and Publisher of The Hill,
concurrent with his resignation, exercised an option to liquidate and
cash-out a phantom equity interest in The Hill, that was granted to him
upon the start-up and launch of The Hill in 1994. Under the terms of his
agreement, the amount owed to him was $224,922. This included the phantom
equity interest, accrued bonus and vacation, plus interest at 8%. It was
paid in three installments. Two installments that totaled $112,461 were
paid in April and May 2003 and the final installment of $112,461 was made
in May 2004. Compensation expense of $224,500 associated with this
transaction was included in general and administrative expense for the year
ended December 31, 2002.
On September 23, 2002 the minority stockholder, a related party, of DPI
notified the Company of his intention to exercise an option to sell to NCI
the 20% stock ownership that the party holds in DPI at a purchase price of
$1,600,000. An amount of $400,000 was paid on November 27, 2002 and the
balance to be paid, with interest, at prime plus one percent in two equal
installments (i.e. $600,000 plus interest) on November 27, 2003 and 2004,
which amounts may be paid in 2004 and 2005 without violating the terms of
the Company's agreement with the minority stockholder. The first
installment with interest was paid in 2004. Current amounts payable to
related parties in the amount of $631,418 at December 31, 2004 consisted of
the second installment in the amount of $600,000 at an interest rate of
prime plus one percent until November 27, 2004 and at 8% per annum
thereafter, due to the former minority stockholder (see Note 4).
Interest expense for the years ended December 31, 2004 and 2003 relating to
the above notes was approximately $52,400 and $84,400, respectively.
Certain Company office facilities have been leased since 1988 from an
officer of a subsidiary of the Company. Rental expense amounted to
approximately $81,800 and $81,600 for the years ended December 31, 2004 and
2003, respectively. The lease payment is adjusted annually based on the
Consumer Price Index. The lease term is for ten years with a renewal option
of five years. The original lease term expires on October 31, 2008.
Amounts owed to officers and other employees of the Company for bonuses and
expenses amounted to approximately $192,332 at December 31, 2004, and are
included in accrued expenses.
6. Leases
The Company leases all operating facilities under operating leases expiring
through May 2015. Rent expense under operating leases was approximately
$367,000 and $345,000 for the years ended December 31, 2004 and 2003,
respectively. The future minimum payments under non-cancelable leases for
operating facilities and equipment (capital leases) consisted of the
following at December 31, 2004:
F-11
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Capital Operating
Year ending December 31, Leases Leases
---------------------------------------------------
2005 $ 8,858 $ 218,371
2006 7,516 361,989
2007 7,516 302,126
2008 2,506 293,653
2009 0 219,334
Thereafter 0 1,313,711
---------------------------------------------------
Total minimum lease payments $26,396 $2,709,184
---------------------------------------------------
The operating leases also provide for cost escalation payments and payments
for maintenance and real estate taxes. The Company has options to renew
certain leases for additional five-year terms.
7. Commitments
On May 8, 2001, the Company entered into a Letter Agreement with the
President of the Company. The Letter Agreement provides for his employment
at a base salary of $150,000 per annum plus bonuses and other benefits
(adjusted for an increase of not less than 5% on January 1, 2002 and
annually thereafter). In January 2003, the Board of Directors granted to
the President an increase in the base salary of $100,000 to $250,000,
effective January 1, 2003. Additionally, the Board granted a bonus of
$25,000 for the year ended December 31, 2002 that was paid in 2004.
The Company has an employment agreement expiring in 2007 with the Publisher
and Editor of Dan's Papers. The agreement stipulates an annual salary of
$144,000, adjusted for increases in the Consumer Price index, plus a bonus
in each fiscal year based on net profits (as defined) of DPI, and fringe
benefits of approximately $50,000 annually.
Capitol Hill has an employment agreement expiring in 2007 with the
Associate Publisher of The Hill. The agreement stipulates an annual salary
of $170,000, adjusted for merit increases in the sole and exclusive
discretion of the Board of Directors or Chief Executive Officer of Capitol
Hill, plus on a monthly basis a sum based on net revenues (as defined) of
Capitol Hill.
As of December 31, 2004, the Company had a letter of credit with a lessor
for $34,102. This was secured by a certificate of deposit in the same
amount, which is recorded as restricted cash on the consolidated balance
sheet.
Employee Benefit Plan - The Company has a 401(k) profit sharing plan
covering all eligible employees. Employer matching contributions are
discretionary and are determined on a yearly basis by the Company. For the
years ended December 31, 2004 and 2003, there were no matching
contributions.
8. Common Stock
At December 31, 2004, the Company has approximately 4,678,209 shares of
common stock reserved for issuance upon conversion of outstanding preferred
stock, exercise of options and warrants and convertible notes.
In 2004, holders converted 5,000 shares of $10 preferred stock into 20,767
shares of common stock.
F-12
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
In 2003, pursuant to Subscription Agreements, the Company sold 1,400,000
shares of common stock at a purchase price of $1.00 per share.
In 2003, holders converted 10,000 shares of $10 preferred stock and 5
shares of 10% preferred stock into 39,281 and 3,000 shares of common stock,
respectively.
9. Preferred Stock
Preferred stock consisted of the following:
December 31, 2004
--------------------------------------------------------------------------------
10% nonvoting convertible preferred stock, 1,245 shares
authorized; 15 shares issued and outstanding, $500 per $ 15
share per annum cumulative dividends, $75,000 liquidation value (a)
8% convertible preferred stock, 297 shares authorized, 14 shares
issued and outstanding, $80 per share per annum cumulative dividends,
$14,000 liquidation value (b) 14
$10 convertible preferred stock, 200,000 shares authorized, 177,500
issued and outstanding, $1,775,000 liquidation value (c) 177,500
--------------------------------------------------------------------------------
$177,529
--------------------------------------------------------------------------------
(a) The 10% nonvoting convertible preferred stock is redeemable at the option
of the Company, under certain circumstances. The holders can convert their
shares of preferred stock into shares of common stock at the rate of 600
shares of common stock for each share of preferred stock, subject to
standard anti-dilution provisions.
During 2003, there was a conversion of five shares of 10% nonvoting
convertible preferred stock into 3,000 shares of common stock. As a result,
common stock at par increased by $30, preferred stock at par decreased by
$5, and additional paid-in capital-preferred stock decreased by $25.
During 2004, there were no conversions by holders of the Company's 10%
convertible preferred stock.
During the year ended December 31, 2004 dividends totaling $38,310 were
accrued for the holders of the 10% convertible preferred stock.
(b) The 8% convertible preferred stock may be redeemed, in whole or in part, at
the option of the Company for a redemption price equal to the liquidation
preference of $1,000 per share plus accrued and unpaid dividends. The
holders of the 8% convertible preferred stock may convert each share, at
any time, into shares of common stock. The number of shares of common stock
into which each share of preferred stock may be converted shall be obtained
by dividing $1,000 by a conversion price of $6.30, which is subject to
standard anti-dilution provisions. The 8% convertible preferred stock has
no voting rights except if the Company fails to make four consecutive
payments, then and until such time as all unpaid and accumulated dividends
are paid in full the holders are entitled to vote on an as-converted basis.
As of December 31, 2004, the Company has failed to make four consecutive
payments and as such the holders are entitled to vote until such time as
all unpaid and accumulated dividends are paid in full.
During 2004 and 2003, there were no conversions by holders of the Company's
8% convertible preferred stock.
F-13
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
During the years ended December 31, 2004 and 2003 dividends totaling $1,128
were accrued for the holders of the 8% convertible preferred stock.
(c) In October 1996, the Company entered into an agreement with a group of
investors to which the Company issued 200,000 shares of a newly designated
$10.00 convertible preferred stock for an aggregate consideration of
$2,000,000. In April 1998, the Company entered into an agreement pursuant
to which the Company issued 20,000 shares of $10 convertible preferred
stock - Series 2, for an aggregate consideration of $200,000. The holders
of $10 convertible preferred stock, acting as a single class, are entitled
to nominate and elect, at all times, one-half of the total number of
directors of the Company. In May 2001, the $10 convertible preferred
stockholders waived this right as long as James A. Finkelstein is serving
as President and Chief Executive Officer.
During 2004 there was one conversion by a holder of 5,000 shares of the
Company's $10 convertible preferred stock into 20,767 shares of the
Company's common stock. As a result, common stock at par increased by $208,
additional paid-in capital - common stock increased by $49,792, preferred
stock at par decreased by $5,000 and additional paid-in capital - preferred
stock decreased by $45,000.
During 2003 there was one conversion by a holder of 10,000 shares of the
Company's $10 convertible preferred stock into 39,281 shares of the
Company's common stock. As a result, common stock at par increased by $393,
additional paid-in capital - common stock increased by $99,607, preferred
stock at par decreased by $10,000 and additional paid-in capital -
preferred stock decreased by $90,000.
Dividends on the $10 convertible preferred stock are noncumulative and are
payable at a rate of five times the amount of dividends, if any, per share
declared and paid by the Company on its common stock.
The holders of the $10 convertible preferred stock may convert each share,
at any time, into shares of common stock. The number of shares of common
stock into which each share of the $10 convertible preferred stock may be
converted is obtained by dividing $10 by a conversion price. The conversion
price was initially set at $6.00, and is subject to adjustments generally
for dilution or decline in the market price below $6.00. As a result of
these adjustments, the current conversion price is $2.35.
The holders of the $10 convertible preferred stock have substantially the
same voting rights as the holders of the Company's common stock; however,
the vote of the holders of the $10 convertible preferred stock, acting as a
single class, is required for stockholder approval of certain corporate
matters. Each holder of the $10 convertible preferred stock is entitled to
the number of votes that he or she would have had if each share of the $10
convertible preferred stock had been converted into shares of common stock.
10. Stock-based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
establishes financial accounting and reporting standards for employee
stock-based compensation plans and to transactions in which an entity
issues its equity instruments to acquire goods or services from
non-employees. SFAS 123 encourages, but does not require, companies to
record compensation cost for employee stock-based compensation plans at
fair value. The Company has elected, as permitted by SFAS 123, to account
for its employee plans using the intrinsic value based method of accounting
prescribed by APB 25, as described in Note 2. However, pro forma
disclosures of net income and earnings per share must be made as if the
SFAS 123 accounting
F-14
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
standard had been adopted. The fair value of options for purposes of the
SFAS pro forma disclosures has been estimated using a Black-Scholes
option-pricing model.
Information regarding the Company's stock option plans is as follows:
(a) 1987 Stock Option Plan - The Company has a Stock Option Plan (the
"Plan), which it adopted in 1987, pursuant to which it has reserved
authorized, but unissued, shares of common stock for issuance of both
qualified incentive stock options and non-qualified stock options to
employees, officers and directors of the Company. Because the Plan
terminated in 1997, no further incentive stock options were granted.
The option price will be the fair market value (110%) of the fair
market value for qualified incentive stock options granted to a holder
of 10% or more of the Company's common stock as defined by the Plan.
Generally, options may be exercised commencing two years from the date
of grant and terminating ten years from the date of grant. The
following is a summary of transactions:
Years ended December 31, 2004 2003
------------------------------------------------------------------
Outstanding, beginning of period 6,666 8,333
Granted during the period - -
Expired during the period (5,000) (1,667)
------------------------------------------------------------------
Outstanding, end of period (1) 1,666 6,666
------------------------------------------------------------------
Options exercisable, December 31 1,666 6,666
------------------------------------------------------------------
Weighted average remaining contractual
years at December 31 0.5 0.8
------------------------------------------------------------------
With an exercise price per share ranging from $7.31 to $7.88, the
weighted average exercise price per share at December 31, 2004 and
2003 was $7.31 and $7.73, respectively.
(b) Directors and Officers Stock Option Plan - On August 17, 1993, the
Board of Directors adopted a Discretionary Directors and Officers
Stock Option Plan as amended (the "Discretionary Option Plan")
pursuant to which the Board may award options to purchase an aggregate
of 500,000 shares of common stock to directors and officers of the
Company and its subsidiaries which shall be exercisable at the market
price on the date of grant for periods (generally five years) and,
under certain conditions, a time period specified by the Board in such
grants. Options under the Discretionary Option Plan are nonqualified
and non-incentive options for purposes of income taxation and are not
intended to qualify under Section 422A of the Internal Revenue Code of
1986. No grants were made under the Discretionary Option Plan during
the fiscal years ended December 31, 2004 and 2003.
On August 17, 1993, the Board also adopted a Non-Discretionary
Directors Stock Option Plan (the "Non-Discretionary Option Plan")
pursuant to which each director will be granted, on August 17, 1993
and each anniversary thereof on which he or she continues to be a
director, a five year option to purchase 3,333 shares of common stock
at the market price on the date of the grant. Under this plan, a
maximum of 40,013 shares of common stock is available for issuance.
The Non-Discretionary Option Plan also provides that any person
becoming a director within the six months after any August 17 will be
granted options. On August 17, 2004, options to purchase 23,331 shares
of common stock were granted at an exercise price of $1.00 per share
and a fair market value of $.326 per share. The following is a summary
of transactions relating to the Directors and Officers' Stock Option
Plans:
Years ended December 31, 2004 2003
----------------------------------------------------------------------
Outstanding, beginning of period 319,987 296,656
Granted during the period 23,331 23,331
Expired during the period (216,664) -
----------------------------------------------------------------------
F-15
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Outstanding, end of period (1) 126,654 319,987
----------------------------------------------------------------------
Options exercisable at December 31 126,654 319,987
----------------------------------------------------------------------
Weighted average remaining contractual
years at December 31 2.5 1.4
----------------------------------------------------------------------
(1) With an exercise price per share ranging from $0.79 to $7.88, the
weighted average exercise price at December 31, 2004 and 2003 was
$0.919 and $4.32 per share, respectively.
(c) 1999 Stock Option Plan - The Company has a stock option plan (the
"1999 Plan") pursuant to which it has reserved authorized, but
unissued, shares of common stock for issuance of both qualified
incentive stock options and nonqualified stock options to employees,
officers and directors of the Company and other individuals providing
services to or for the Company. Under the Plan, a maximum of 193,513
shares of common stock are available for issuance. The option price
will be the fair market value as defined by the Plan. Generally,
options may be exercised commencing two years from the date of grant
and terminating ten years from the date of grant. In June 2000, the
Company entered into stock option agreements with certain employees
for options to purchase 136,000 shares of common stock at an exercise
price of $1.188 per share, which represented the fair market value on
the date of the grant. The options vested in June 2002. In November
2000, the Company entered into a stock option agreement with a
consultant for options to purchase 18,000 shares of common stock at an
exercise price of $1.00 per share. The options vested immediately. The
following is a summary of transactions:
Years ended December 31, 2004 2003
--------------------------------------------------------------------
Outstanding, beginning of period 46,500 46,500
Granted during the period - -
Expired during the period - -
--------------------------------------------------------------------
Outstanding, end of period (1) 46,500 46,500
--------------------------------------------------------------------
Options exercisable at December 31 46,500 46,500
--------------------------------------------------------------------
Weighted average remaining contractual
years at December 31 7.6 8.6
--------------------------------------------------------------------
(1) With an exercise price per share ranging from $1.00 to $1.19, the
weighted average exercise price at December 31, 2004 and 2003 was
$1.11 and $1.11, respectively.
For purposes of pro forma disclosure, the estimated fair value of the
options and warrants are amortized to expense over the vesting period of
the options and warrants. The fair value of these options and warrants was
estimated at the date of grant using a Black-Scholes options pricing model
with the following weighted average assumptions for 2004 and 2003,
respectively: risk-free interest rate of 3.87% and 3.35%; volatility factor
of the expected market price of the Company's common stock of 28.5%; and
weighted average expected lives of 0.8 and 8.6 years (see Note 2).
11. Stock Warrants
At December 31, 2004, the Company has 3,315,873 shares of stock reserved
for issuance upon exercise of warrants. Information regarding the Company's
warrants outstanding is as follows:
Non-Redeemable Warrants - At December 31, 2004 and 2003, the Company had
outstanding 3,315,873 and 3,315,873 non-redeemable warrants, respectively.
At December 31, 2004 and 2003, 3,315,873 and 3,315,873 non-redeemable
warrants were exercisable, respectively. Each warrant entitles the holder
to purchase one share of the Company's common stock at an exercise
F-16
News Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------
price ranging from $1.00 to $6.00 per share. The warrants are exercisable
and expire on the following dates:
Number of warrants Grant date Expiration date
----------------------------------------------------------
15,873 January 11, 2000 January 11, 2005
300,000 June 4, 2001 June 4, 2006
3,000,000 June 4, 2001 April 19, 2006
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There were no exercises of non-redeemable warrants during the years ended
December 31, 2004 and 2003.
All of the warrants that expire January 2005 were issued in connection with
the conversion of 8% preferred stock to common stock. All of the warrants
that expire June 2006 were issued to an affiliate of the principal
stockholder of the Company in connection with a promissory note (see Note
5). All of the warrants that expire April 2006 were issued to the President
of the Company, pursuant to a Letter Agreement, as additional consideration
for his common stock investment.
12. Income Taxes
The Company has a deferred tax asset amounting to approximately $6.2
million at December 31, 2004, principally relating to cumulative net
operating loss carryforwards and a basis difference in the carrying amount
of trade accounts receivable for financial reporting purposes and the
amount used for income tax purposes. The Company recorded a valuation
allowance amounting to the entire deferred tax asset balance due to the
Company's financial condition, its lack of a history of consistent
earnings, and possible limitations on the use of the operating loss
carryforwards giving rise to uncertainty as to whether the deferred tax
asset is realizable.
As of December 31, 2004, the Company had net operating loss income tax
carryforwards of approximately $17.9 million, which expire in the years
2007 through 2024. Current federal tax laws include substantial
restrictions on the utilization of net operating losses in the event of an
"ownership change" of a corporation. The Company's ability to utilize net
operating loss carryforwards may be limited as a result of an ownership
change. Such a limitation could result in the expiration of carryforwards
before they are utilized.
The Company recorded provisions of approximately $44,500 and $23,000 for
state and local income taxes for the years ended December 31, 2004 and
2003, respectively.
13. Recent Accounting Standards
In December 2004, the FASB issued FAS No. 123(R), "Share-Based Payment."
This Statement establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. It
also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement changes the accounting for transactions
in which an entity obtains employee services in share-based payment
transactions. This Statement does not change the accounting guidance for
share-based payment transactions with parties other than employees provided
in FAS 123 as originally issued and EITF Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services." This Statement is
effective for interim and annual periods beginning after June 15, 2005 and
applies to all outstanding and unvested stock-based payment awards at the
date of adoption. We anticipate the adoption of FAS 123(R) will affect our
results of operations to an extent similar to that as presented in our FAS
123 pro forma disclosure included in the accompanying audited financial
statements.
F-17
News Communications, Inc. and Subsidiaries
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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.
14. Sale of Publication
On September 30, 2003, NCI completed the sale of the assets of GSN to World
Business Media LLC for $125,000 resulting in a net gain of approximately
$117,000. 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 first
installment of $10,000 was paid by the buyer on the first anniversary date.
The note is secured by a security interest in all of the assets of World
Business Media LLC.
15. Sale of Subsidiaries
On November 11, 2002, NCI completed the sale of substantially all of the
assets and liabilities of Tribco Incorporated ("Queens") to Queens Tribco
LLC for $1,115,000 resulting in a net gain of approximately $89,000. As
part of the proceeds, the buyer paid cash of $318,333, surrendered 500,001
shares of common stock having a value of $410,000 based upon a price of
$0.82 per share, and issued to NCI a note in the principal amount of
$386,667 with interest of 5% per annum. The first installment of $135,000
plus accrued interest was paid on the first anniversary date. In January
2004, the balance of $251,667 was paid, net of a pre-payment discount of
$15,667.
On August 3, 2001, NCI completed the sale of Manhattan Newspaper Group
("Manhattan") to Manhattan Media Corp. for $910,000 resulting in a net loss
of approximately $375,000. As part of the proceeds, Manhattan Media Corp
issued to NCI a note in the principal amount of $550,000 with interest of
5% per annum. A principal payment of $50,000 plus accrued interest on the
outstanding balance was paid on each of the first and second anniversary
dates. In January 2004, the balance of $450,000 plus accrued interest was
paid, net of a pre-payment discount of $30,000.
On April 30, 2001, NCI completed the sale of substantially all of the
assets and liabilities of the Nassau Community Newspaper Group, Inc. and
South Shore Publishers, Inc. ("Nassau") to NCN Acquisition LLC for
$450,000, resulting in a net loss of approximately $525,000. As part of the
proceeds, NCN Acquisition LLC issued NCI a note in the aggregate principal
amount of $175,000 with interest of 6.25% per annum. Accrued interest was
paid on the first and second anniversary dates. In May 2004, the
outstanding principal balance of $175,000 plus accrued interest was paid.
16. Subsequent Events
F-18
News Communications, Inc. and Subsidiaries
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On February 3, 2005, pursuant to a Subscription Agreement with, D.H. Blair
Investment Banking Corp., the Company satisified $200,000 of our 8%
convertible note plus accrued interest thereon of $62,597 by issuing
375,139 shares of common stock at a price of $0.70 per share.
On January 20 and 31, 2005, NCI borrowed an aggregate of $350,000 from
stockholders and issued 8% convertible notes in the face amounts of
$224,000 and $126,000 to Kinder Investments LP and Rosalind Davidowitz,
respectively. The notes are convertible into common stock at a conversion
price of $0.70 per share.
F-19