<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended September 30, 1998
Commission File No. 0-27994
-------
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-3203301
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
186 P.C.N.A. PARKWAY
LAKE HELEN, FL 32744
904-228-1000
(Address and telephone number
of principal executive offices)
Indicate by check mark 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:
X Yes No
-- --
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
Common Stock: no par value 3,529,100
Transitional Small Business Disclosure Format (check one): Yes X No
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets
as of September 30, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Operations
for the three and nine months ended September 30, 1998 and 1997
(unaudited) 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997
(unaudited) 5 - 6
Notes to unaudited interim financial statements 7 - 9
ITEM 2. Management's Discussion and Analysis of Interim Financial
Condition and Results of Operations 10 - 15
PART II - OTHER INFORMATION
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
Exhibit 27 - Financial data schedule
2
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $2,532,946 $1,710,304
Available-for-sale securities 876 1,007,050
Accounts receivable, less allowance for doubtful
accounts of $200,415 at September 30, 1998
and $414,693 at December 31, 1997 237,700 1,308,884
Directories in progress 360,472 463,414
Other current assets 137,969 65,010
---------- ---------
Total current assets 3,269,963 4,554,662
Property and equipment, net 1,352,032 1,481,549
Goodwill, net --- 1,898,680
Investment in College Directory Publishing Corporation 200,000 ---
Other assets 299,562 116,786
---------- ----------
Total assets $5,121,557 $8,051,677
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $187,229 $1,013,787
Accrued expenses 205,620 552,529
Income taxes payable --- 50,000
Deferred revenue 930,299 894,109
Capitalized leases --- 5,358
Mortgage payable 53,333 53,333
---------- ----------
Total current liabilities 1,376,481 2,569,116
Capitalized leases payable after one year --- 10,717
Mortgage payable after one year 653,333 693,333
---------- ----------
Total liabilities 2,029,814 3,273,166
Shareholders' equity:
Common shares, no par value:
15,000,000 shares authorized; 4,868,900 shares
issued at September 30, 1998; 4,869,900
shares issued and outstanding at December 31, 1997 5,828,448 5,834,698
Unearned compensation, net (4,167) (15,417)
Unrealized loss on available-for-sale securities --- (3,033)
Accumulated deficit (1,873,042) (1,037,737)
Treasury stock; 1,339,800 shares at cost (859,496) ---
---------- -----------
Total shareholders' equity 3,091,743 4,778,511
---------- -----------
Total liabilities and shareholders' equity $5,121,557 $8,051,677
========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $1,223,752 $2,286,564 $4,919,664 $5,344,657
Costs and expenses:
Production 302,941 709,170 1,156,902 1,497,153
Marketing and selling 668,940 1,162,574 2,735,881 2,335,417
Depreciation 36,831 43,325 126,616 111,045
Amortization 5,637 30,848 61,611 44,831
General and administrative 400,675 825,450 1,469,916 1,872,085
--------- --------- ---------- ----------
1,415,024 2,771,367 5,550,926 5,860,531
--------- --------- ---------- ----------
Loss from operations (191,272) (484,803) (631,262) (515,874)
Interest income, net of expense 11,515 49,625 16,701 110,465
Sale of subsidiary 2,858 --- (220,744) ---
--------- --------- ---------- ----------
Net loss ($176,899) ($435,178) ($835,305) ($405,409)
========= ========= ========= =========
Net loss per common share
Basic ($0.04) ($0.09) ($0.19) ($0.09)
========= ========= ========= =========
Diluted ($0.04) ($0.09) ($0.19) ($0.09)
========= ========= ========= =========
Shares used in computing net loss per share
Basic 3,936,592 4,614,900 4,354,518 4,282,690
========= ========= ========= =========
Diluted 3,936,592 4,614,900 4,354,518 4,282,690
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
---------- ---------
<S> <C> <C>
Net loss ($835,305) ($405,409)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 188,227 155,876
Accretion of unearned compensation 5,000 17,917
Bad debt expense 110,243 551,526
Exchange of advertising for machinery & equipment (6,480) (9,025)
Gain on sale of securities (14,847) (21,554)
Interest accrued on U.S. Treasury securities --- (36,702)
Loss from sale of CDP 220,744 ---
Changes in assets and liabilities, net of sale (acquisition in 1997)
of CDP:
(Increase) decrease in accounts receivable 694,989 (832,654)
Increase in directories in progress (665,381) (386,043)
Increase in other assets (179,039) (133,087)
Increase (decrease) in accounts payable (752,861) 121,301
Increase (decrease) in accrued expenses (126,275) 372,939
Increase in deferred revenue 729,276 654,685
-------- --------
Net cash provided by (used in) operating activities (631,709) 49,770
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (acquisition in 1997) of CDP, net of cash balance 1,072,152 (363,938)
Sale of securities available-for-sale 1,024,000 1,899,781
Purchases of U.S. Treasury securities --- (1,375,790)
Purchases of property, plant and equipment (69,612) (223,249)
---------- ---------
Net cash provided by (used in) investing activities 2,026,540 (63,196)
CASH FLOWS FROM FINANCING ACTIVITIES
Compensation issued as shares of common stock --- 9,633
Repayment of mortgage principal (40,000) (40,000)
Repayment of capitalized leases (2,187) (493)
Contingent consideration paid relating to acquisition of CDP (14,256) ---
Purchases of treasury stock (515,746) ---
-------- -------
Net cash used in financing activities (572,189) (30,860)
Net increase (decrease) in cash and cash equivalents 822,642 (44,286)
Cash and cash equivalents at beginning of period 1,710,304 1,760,831
--------- ---------
Cash and cash equivalents at end of period $2,532,946 $1,716,545
========== ==========
</TABLE>
5
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
SUPPLEMENTAL CASH FLOW INFORMATION 1998 1997
--------- ---------
Interest paid $45,104 $59,811
======= ========
Exchange of advertising for supplies $20,515 $24,775
======= ========
Acquisition of CDP by issuance of common stock --- $687,500
======= ========
Non-cash items received from sale of CDP $643,750 ---
======= ========
See accompanying notes.
6
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Publishing
Company of North America, Inc. and subsidiary (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included in the accompanying unaudited consolidated financial statements.
The results of operations of any interim period are not necessarily indicative
of the results of operations for the fiscal year.
2. CONSOLIDATION
The consolidated financial statements include the accounts of the Company's bar
and medical association directory publishing division ("PCNA") and its
wholly-owned subsidiary, College Directory Publishing, Inc. ("CDP") since the
acquisition of CDP on July 3, 1997 and until its sale on June 10, 1998 (see Note
11). Intercompany transactions have been eliminated in consolidation.
3. CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
4. AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported as a separate component of shareholders' equity. Fair
value is determined by readily available market quotations. Realized gains and
losses and declines in value judged to be other-than-temporary are included in
investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends are included in investment income.
5. ACCOUNTS RECEIVABLE
Accounts receivable are comprised primarily of amounts due from advertisers in
the bar association and campus directories. The Company's allowance for doubtful
accounts is estimated by management as a percentage of sales. Prior to December
31, 1997, amounts outstanding more than six months but less than one year were
included as accounts receivable but fully provided for in the allowance for
doubtful accounts. At December 31, 1997 and thereafter all amounts outstanding
in excess of six months are written off.
7
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6. REVENUE RECOGNITION
Revenues and related costs are recorded by the Company upon shipment of
directories. Costs accumulated under directories in progress are stated at
estimated costs, not in excess of estimated realizable value. Deferred revenue
represents amounts received from advertisers prior to shipment of the related
directories.
7. GOODWILL
Goodwill resulting from the acquisition of CDP was amortized using the
straight-line method over twenty years until the sale of CDP on June 10, 1998.
(See Note 11.)
8. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, EARNINGS
PER SHARE. SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options. Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. Earnings per share amounts for 1997 have been
restated to conform to the Statement 128 requirements. The following table sets
forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
1998 1997 1998 1997
---- ---- ---- ----
Numerator:<S> <C> <C> <C> <C>
Net loss from continuing operations ($176,899) ($435,178) ($835,305) ($405,409)
--------- --------- --------- --------
Numerator for basic loss per share - loss
available to common shareholders ($176,899) ($435,178) ($835,305) ($405,409)
Effect of dilutive securities --- --- --- ---
--------- --------- --------- --------
Numerator for diluted loss per share -
loss available to common shareholders
after assumed conversions ($176,899) ($435,178) ($835,305) ($405,409)
Denominator:
Denominator for basic loss per share -
weighted-average shares 3,936,592 4,614,900 4,354,518 4,282,690
Effect of dilutive securities - stock options --- --- --- ---
--------- --------- --------- --------
Denominator for diluted loss per share -
Adjusted weighted-average shares and
assumed conversions 3,936,592 4,614,900 4,354,518 4,282,690
Basic loss per share ($0.04) ($0.09) ($0.19) ($0.09)
===== ===== ===== =====
Diluted loss per share ($0.04) ($0.09) ($0.19) ($0.09)
===== ===== ===== =====
</TABLE>
8
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
8. EARNINGS PER SHARE (continued)
In computing diluted EPS for 1998, options for 197,600 (151,600 in 1997) shares
were excluded from the diluted earnings per share computation because their
effects would have been antidilutive.
9. STOCK-BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING AND DISCLOSURE OF STOCK-BASED COMPENSATION. SFAS No. 123 allows
companies to continue to measure compensation cost for stock-based employee
compensation plans using the intrinsic value method of accounting as prescribed
in Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES and related interpretations. The Company has elected to continue
its APB Opinion No. 25 accounting treatment for stock-based compensation, and
has adopted the provisions of SFAS No. 123 requiring disclosure of the proforma
effect on net earnings and earnings per share as if compensation cost had been
recognized based upon the estimated fair value at the date of grant for options
awarded. Such proforma disclosures are not required in interim financial
statements.
10. USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
11. ACQUISITION AND SALE OF COLLEGE DIRECTORY PUBLISHING, INC.
On July 3, 1997, the Company, through a wholly-owned subsidiary, acquired 100%
of the outstanding capital stock of CDP. The acquisition was accounted for under
the purchase method of accounting, and accordingly, the results of operations
have been included in the Company's consolidated statements of operations since
the date of acquisition. The purchase price was allocated to assets acquired and
liabilities assumed based on fair market value at the date of acquisition. This
resulted in an excess of purchase price over net assets acquired of $1,947,282
which was amortized on a straight line basis over 20 years until the sale of CDP
on June 10, 1998, at which time $91,935 of goodwill had been amortized.
On June 10, 1998, the Company sold 100% of CDP to a group headed by the
executive management of CDP in exchange for (i) $1,400,000 (including $1,100,000
in loans made to CDP by the Company; (ii) a $100,000 note from the corporation
acquiring CDP (the "Acquiror" or "College Directory Publishing Corporation") due
upon the earlier of December 15, 1999 or completion of the Acquiror's initial
public offering ("IPO"); $200,000 in preferred stock of the Acquiror convertible
into $1,000,000 of common stock upon completion of an IPO by the Acquiror; and
(iv) 750,000 shares of the Company's common stock that it issued when it
acquired CDP in July 1997. The Company posted a loss of $220,744 as a result of
the sale transaction; this loss was primarily attributable to the decline in
value of the Company shares issued in the acquisition and returned in the sale.
The value attributed to the shares at the time of the acquisition (excluding
those considered contingent consideration) was $687,500; these same shares were
valued at $343,750 when returned to the Company upon the sale.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth the Company's results of operations for the
three and nine months ended September 30, 1998 and 1997, showing the results of
PCNA and CDP separately and on a consolidated basis. CDP was acquired on July
3, 1997 and sold on June 10, 1998; therefore, it is included in the Company's
consolidated results for the periods beginning July 1, 1997 through June 30,
1998:
<TABLE>
<CAPTION>
Three months ended
Sept. 30, 1998 Three months ended Sept. 30, 1997
PCNA PCNA CDP Consolidated
------------- ---- --- ------------
<S> <C> <C> <C> <C>
Net sales $1,223,752 $1,916,589 $369,975 $2,286,564
Costs and expenses:
Production 302,941 610,702 98,468 709,170
Marketing and selling 668,940 935,082 227,492 1,162,574
Depreciation 36,831 40,528 2,797 43,325
Amortization 5,637 30,848 --- 30,848
General and administrative 400,675 600,476 224,974 825,450
---------- ---------- --------- ----------
1,415,024 2,217,636 553,731 2,771,367
---------- ---------- --------- ----------
Loss from operations (191,272) (301,047) (183,756) (484,803)
Interest income (expense), net 11,515 60,499 (10,874) 49,625
Sale of subsidiary 2,858 --- --- ---
---------- ---------- --------- ----------
Net loss ($176,899) ($240,548) ($194,630) ($435,178)
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
Nine months ended Sept. 30, 1998 Sept. 30, 1997
PCNA CDP* Consolidated Consolidated
---- ---- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $4,919,664 --- $4,919,664 $5,344,657
Costs and expenses:
Production 1,156,902 --- 1,156,902 1,497,153
Marketing and selling 2,577,654 $158,227 2,735,881 2,335,417
Depreciation 115,717 10,899 126,616 111,045
Amortization 61,611 --- 61,611 44,831
General and administrative 1,234,349 235,567 1,469,916 1,872,085
---------- -------- --------- ----------
5,146,233 404,693 5,550,926 5,860,531
---------- -------- --------- ----------
Loss from operations (226,569) (404,693) (631,262) (515,874)
Interest income (expense), net 49,384 (32,683) 16,701 110,465
Sale of subsidiary (220,744) --- (220,744) ---
---------- -------- --------- ----------
Net loss ($397,929) ($437,376) ($835,305) ($405,409)
* CDP's results are through its sale on June 10, 1998.
</TABLE>
10
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
RESULTS OF OPERATIONS (CONTINUED)
As is evident in the tables above, CDP's results of operations and its sale
on June 10, 1998 (see Note 11 to the Unaudited Interim Financial Statements) had
a significant negative impact on the Company's consolidated operations in the
third quarter of 1997 and year-to-date in 1998. CDP posted no revenues in 1998
and a loss of $437,000 before it was sold on June 10, 1998. CDP's losses in
1998 and in the third quarter of 1997 were expected due to the seasonality of
its business, with the great majority of its revenues occuring in the fourth
quarter of each year. The loss of $221,000 resulting from the sale of CDP was
primarily attributable to the decrease of $344,000 in the value of the stock
that was issued in the acquisition and then returned to the Company in the sale.
PCNA's revenues (which excludes CDP) decreased $693,000 or 36% for the
quarter ended September 30, 1998 from the same period a year earlier; for the
nine months then-ended its revenues decreased $55,000 or 1% from the same period
a year earlier. In the third quarter of 1998, it published 15 directories,
compared to 20 in the same period in 1997. PCNA has discontinued the
publication of certain directories that had higher production costs relative to
revenues. This action has contributed to lower production costs relative to
revenues in 1998. Even given the reduced publication schedule, revenues in the
most recent quarter were lower than expected due to lower-than-anticipated sales
as described below. In the third quarter of 1997 PCNA published a directory for
the Bar Association of the City of New York; due to difficulties with that
publication, PCNA cancelled the agreement. In its place, PCNA contracted to
publish a directory of advertising to accompany an unofficial directory of New
York state attorneys, known to lawyers as the "Red Book," that is sold and
published by another company to more than 30,000 attorneys in that state. This
first-time publication of PCNA contained approximately $250,000 less in
advertising sales than was in the directory published a year earlier for the New
York City bar association. Another factor contributing to the decline in the
most recent quarter's revenues is the reduction of the selling capacity of
PCNA's sales force with the closing of the Orlando sales office at the end of
May 1998. Management believes that this and other actions will contribute to
lower selling costs as a percentage of revenues although this trend is not
apparent in the 1998 results to date.
The following table sets forth PCNA's results of operations (excluding CDP)
in percentages of revenues for the three and nine months ended September 30,
1998 and 1997:
<TABLE>
<CAPTION>
Three months ended Sept. 30 Nine months ended Sept. 30
1998 1997 1998 1997
PCNA PCNA PCNA PCNA
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Production 24.8% 31.9% 23.5% 28.1%
Marketing and selling 54.6% 48.8% 52.4% 42.4%
Depreciation 3.0% 2.1% 2.3% 2.2%
Amortization 0.5% 1.6% 1.3% 0.9%
General and administrative 32.7% 31.3% 25.1% 33.1%
------ ----- ------ -----
115.6% 115.7% 104.6% 106.7%
------ ----- ------ -----
Loss from operations (15.6%) (15.7%) (4.6%) (6.7%)
</TABLE>
11
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
RESULTS OF OPERATIONS (CONTINUED)
PCNA's production costs for the periods shown in 1998 have decreased from
those in the same periods in 1997 due to the discontinuation of directories
having higher third-party production costs as a percentage of revenues and
also due to improved production methods resulting in lower in-house labor
costs.
PCNA's general and administrative expenses decreased $200,000 for the quarter
ended September 30, 1998 from the same period a year earlier; for the nine
months then ended these expenses decreased $413,000 from the same period a
year earlier. They were higher as a percentage of revenues in the most
recent quarter solely because of the lower revenues. The largest reductions
were made in bad debt expense, in administrative payroll expense, and in
certain outside professional services expense. The majority of the
amortization expense related to Goodwill from the acquisition of CDP.
Management has taken steps to reduce marketing and selling costs, the great
majority of which are the costs of selling print advertising rather than the
securing of publishing contracts; however, management's efforts have not
resulted in reductions of these expenses to date. In fact, these expenses
increased for the periods in 1998 shown above, primarily due to increases in
related payroll costs. Management is continuing to focus on the reduction of
these expenses as having a primary influence upon PCNA's results of
operations; however, there can be no assurances that reductions will occur
over the balance of 1998.
In conjunction with its action to discontinue publication of certain
directories that had higher production costs relative to revenue, PCNA has
endeavored to revise or replace most of its other publishing agreements.
PCNA generally has published under a "free directory program" by which
directories are provided to all members of a professional association at no
charge to either the individual members or the association. In mid-1998
efforts began to transition agreements to a "directory participation program"
by which directories may be purchased by either individual members or the
association, often for a charge which can be billed as shipping and handling.
In some cases, associations may choose a directory price from which PCNA and
the association share in the revenues. This revised program may provide at
least two benefits to PCNA. First, it may provide an additional source of
revenue which could substantially offset the production and distribution
costs. Secondly, it may substantially reduce PCNA's cost by reducing the
number of directories that must be printed and distributed. Through
September 30, 1998, PCNA has not published any directories under the new
program; it expects most of its agreements to be under the new program by the
third quarter of 1999. There can be no assurances that the Company will be
able to transition most of its agreements to the new program, nor that the
Company will realize the benefits to revenues and costs described above.
12
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 the Company had approximately $2,533,000 in cash and
cash equivalents. In June 1998 the Company received net cash proceeds of
approximately $1,072,000 from the sale of CDP. In conjunction with the sale
of CDP and the receipt of this cash, the Company's Board of Directors
resolved that $1,400,000 of the cash balance may not be used without specific
approval of the Board.
The Company also received a promissory note from the Acquiror for $100,000
plus interest bearing at 5% and due no later than December 15, 1999, and
$200,000 of preferred stock of the Acquiror, convertible into $1,000,000 of
common stock upon certain conditions generally involving the Acquiror's
contemplated initial public offering of its common stock or its acquisition
by a publicly-owned company.
The Company used $632,000 of cash in operating activities during the first
nine months of 1998, compared to $50,000 cash provided by operations during
the same period in 1997. The net loss of $835,000 in 1998 included the
non-cash loss of $221,000 from the sale of CDP. Other significant factors
relating to changes in the Company's cash in 1998 included a decrease of
$695,000 in accounts receivable, an increase of $665,000 in directories in
progress, a decrease of $753,000 in accounts payable, and an increase of
$729,000 in deferred revenue. All of these changes were primarily
attributable to CDP's highly seasonal business cycle. In the first half of
1998, CDP paid down the high accounts payable balance it had at the end of
1997 which resulted from the high volume of publications it had printed and
shipped in the last quarter of that year. Also in the first half of 1998,
CDP began to accumulate costs (which are reported as directories in progress)
and it began to collect deferred revenues on directories that would not be
published until late 1998. These changes were all expected and normal for
CDP's business cycle.
The Company has no plans at this time to acquire a material amount of capital
assets.
The Company's Board of Directors has authorized the Company to repurchase up
to $1,000,000 of its outstanding shares of common stock. From January 1
through September 30, 1998, the Company purchased 589,800 shares of its
common stock at an average cost of $0.87 per share, including 250,000 shares
purchased from its former Executive Vice President and a then-current
director at an average price of $0.66 per share. From October 1 through
November 10, 1998 the Company purchased 72,000 shares of its common stock at
an average cost of $1.02 per share.
In addition to the Company's repurchases, treasury stock includes 750,000
shares returned to the Company in conjunction with the sale of CDP. These
shares were issued as part of the purchase consideration when CDP was
acquired in 1997. Of these, 250,000 shares were contingent consideration to
be based upon achievement of specified earnings in future periods; no cost
was recorded for these either at the time of issuance or at the time of
return to the Company.
Based on current cash and investment balances and the Company's anticipated
results of future operations, the Company believes that it has sufficient
cash resources to fund its operations for the next twelve months or more.
13
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
YEAR 2000 CONSIDERATIONS
Many companies will face potentially serious issues associated with the
inability of existing data processing hardware and software to appropriately
recognize calendar dates beginning in the year 2000. The Company believes it
has identified its software applications and hardware devices that might be
impacted by the Year 2000 issue. The Company does not expect that the cost
of addressing any Year 2000 issue that is within its control will be a
material event or uncertainty that would have a material adverse effect on
future operating results or financial condition.
All computer software used by the Company is run upon personal computers.
The Company's general ledger system was recently upgraded and is now Year
2000 compliant. The Company believes that all of its desktop publishing
software is Year 2000 compliant. Whereas the Company earlier understood that
its primary database application for sales order management and billing was
Year 2000 compliant, it subsequently was advised otherwise. A Year 2000
compliant version of this system is now being tested among a small number of
other users with good initial results; at this time, it is expected that a
Year 2000 compliant version of this system will be provided to the Company
within the next several months. In the unexpected event that this system is
not able to be made Year 2000 compliant, the Company believes that a
replacement system could be obtained; however, at this time management has
not identified specific alternative replacement systems and can not specify
the approximate cost of a replacement system. The system currently in use
was procured for approximately $84,000.
Generally, the goods and services that the Company purchases from its vendors
and suppliers are not considered to be directly vulnerable to Year 2000
issues; additionally, these goods and services are not unique and are
available to the Company from numerous alternative vendors and suppliers.
Reliable telephone service is critical particularly to the Company's sale of
advertising in its publications; disruption of telephone service could have a
material effect upon the Company's results of operations and, depending on
the duration, financial condition. The Company does not believe that Year
2000 issues will cause the printing companies with which it contracts to be
unable to produce its directories; however, the Company has not received
assurances or warranties to that effect from these vendors. The Company does
not know and believes it could, at best, only speculate the impact which any
Year 2000 issues might have upon its advertising customers and how that
impact would affect their decisions to purchase advertising from the Company.
At this time, the Company does not have in place a contingency plan in the
event of the most reasonably likely worst case scenario; it is uncertain at
this time the timing and extent to which such a contingency plan will be
developed.
14
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
FORWARD-LOOKING STATEMENTS
The statements made above relating to: (1) the reduction of selling costs
as a percentage of revenues, (2) the anticipated benefits the Company may
derive from its new directory participation program, (3) the timing for the
Company to convert associations to the new directory participation program,
(4) the anticipated costs to the Company of complying with the Year 2000
conversion, and (5) the anticipated future impact as a result of third
parties not being Year 2000 compliant on a timely basis are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. The results
anticipated by any or all of these forward-looking statements may not occur.
Important factors that may cause actual results to differ materially from the
forward-looking statements include the following: (i) the inability of the
Company to improve selling efficiencies, (ii) the inability of the Company to
sell advertising for large directories such as those for the state of
California and the state of New York, (iii) the inability of the Company to
convert a large number of associations from the Company's "free directory
program" to the new directory participation program, (iv) the inability of
the Company to market its bar and medical association directories under the
directory participation program, (v) the inability of the Company to obtain a
new sales order management and billing information technology system which is
Year 2000 compliant, (vi) the failure of third parties which supply services
to the Company to be Year 2000 compliant on a timely basis, and (vii) the
impact of the Year 2000 problem on the Company's advertising customers.
15
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
PART II - OTHER INFORMATION
ITEM 5. Other Information
On November 2, 1998, Peter S. Balise, Chairman of the Board of Directors and
President of the Company, in a private transaction purchased 333,000 shares
or substantially all of the Company's common stock owned by D. Scott Plakon,
a former officer and then-current director of the Company. On November 3,
1998, Mr. Plakon resigned from the Company's Board of Directors to pursue
other interests. Mr. Plakon resigned as an employee on April 17, 1998; he
had served the Company as Executive Vice President since September, 1994.
Pursuant to a prior agreement, Mr. Plakon will continue to perform consulting
services for the Company on an "as needed" basis in exchange for the Company
paying health insurance costs for him and his dependents through May, 1999.
On November 9, 1998, the Company announced the appointment of Andrew J.
Cahill and J. William Wrigley to its Board of Directors. Mr. Cahill is a
Managing Director with Stone Pine Investment Banking LLC. From 1987 to 1997,
he was a Managing Director -Investment Banking for Laidlaw Equities, Inc.
Mr. Cahill brings previous experience with the Company from his active role
in Laidlaw Equities' underwriting of the Company's initial public offering in
1996. He also has been appointed to serve on the Audit Committee of the
Board; his term will expire at the Company's annual meeting in 2001. Mr.
Wrigley joined the Company in January, 1998 as National Sales Manager and
became its Chief Operating Officer in August. He has over 30 years of
experience in the publishing industry, including 18 years with R. H.
Donnelley Corporation. Mr. Wrigley's term on the Board will expire at the
Company's annual meeting in 2000.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
1. Exhibit 27 - Financial Data Schedule
b. No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
16
<PAGE>
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
FORM 10-QSB - SEPTEMBER 30, 1998
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf on November 11,
1998 by the undersigned, thereunto duly authorized.
THE PUBLISHING COMPANY OF NORTH AMERICA, INC.
/s/ Peter S. Balise
------------------------------------
President (Chief Executive Officer)
/s/ James M. Koller
------------------------------------
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,532,946
<SECURITIES> 876
<RECEIVABLES> 438,115
<ALLOWANCES> 200,415
<INVENTORY> 0
<CURRENT-ASSETS> 3,269,963
<PP&E> 1,741,574
<DEPRECIATION> 389,542
<TOTAL-ASSETS> 5,121,557
<CURRENT-LIABILITIES> 1,376,481
<BONDS> 706,666
0
0
<COMMON> 5,828,448
<OTHER-SE> (2,736,705)
<TOTAL-LIABILITY-AND-EQUITY> 5,121,557
<SALES> 4,919,664
<TOTAL-REVENUES> 4,919,664
<CGS> 1,156,902
<TOTAL-COSTS> 5,550,926
<OTHER-EXPENSES> 220,744
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,701
<INCOME-PRETAX> (835,305)
<INCOME-TAX> 0
<INCOME-CONTINUING> (835,305)
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<EXTRAORDINARY> 0
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<NET-INCOME> (835,305)
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