-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D2m+MUzjmwPn/z+P11VxQSsD9/8WUqNWIfRL/D8nkRlzkofSok+jmCEb9Dp9Ll6h yhgONLIuwh4v47AX8y4Aiw== 0000352988-03-000022.txt : 20030515 0000352988-03-000022.hdr.sgml : 20030515 20030515164520 ACCESSION NUMBER: 0000352988-03-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMTEX NEWS NETWORK INC CENTRAL INDEX KEY: 0000352988 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 133055012 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10541 FILM NUMBER: 03705638 BUSINESS ADDRESS: STREET 1: 4900 SEMINARY RD STE 800 CITY: ALEXANDRIA STATE: VA ZIP: 22311 BUSINESS PHONE: 703-820-2000 MAIL ADDRESS: STREET 1: 4900 SEMINARY RD STREET 2: SUITE 800 CITY: ALEXANDRIA STATE: VA ZIP: 22311 FORMER COMPANY: FORMER CONFORMED NAME: COMTEX SCIENTIFIC CORP DATE OF NAME CHANGE: 19920703 10-Q 1 c10q0303.txt FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2003 or ___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ___________ Commission file number 0-10541 COMTEX NEWS NETWORK, INC. (Exact name of registrant as specified in its charter) Delaware 13-3055012 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 4900 Seminary Road Suite 800 Alexandria, Virginia 22311 (Address of principal executive offices) (703) 820-2000 Registrant's Telephone number, including area code Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes___ No _X_ As of May 13, 2003, 13,226,965 shares of the Common Stock of the registrant, par value $0.01 per share, were outstanding. COMTEX NEWS NETWORK, INC. TABLE OF CONTENTS Part I Financial Information: Page No. Item 1. Financial Statements Consolidated Balance Sheets 3 as of March 31, 2003 (unaudited) and June 30, 2002 Consolidated Statements of Operations 4 for the Three and Nine Months Ended March 31, 2003 and 2002 (unaudited) Consolidated Statements of Cash Flows 5 for the Nine Months Ended March 31, 2003 and 2002 (unaudited) Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis 9 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure about Market Risk 15 Item 4. Controls and Procedures 15 Part II Other Information: Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 18 Certifications of Chief Executive Officer and Chief Financial Officer 19 COMTEX NEWS NETWORK, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, June 30, 2003 2002 ------------- ------------- ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 568,039 $ 860,548 Accounts Receivable, Net of Allowance 956,969 1,071,717 of approximately $303,000 and $300,000, at March 31, 2003 and June 30, 2002, respectively Prepaid Expenses and Other Current Assets 88,387 141,673 ------------- ------------- TOTAL CURRENT ASSETS 1,613,395 2,073,938 PROPERTY AND EQUIPMENT, NET 2,818,113 3,445,026 DEPOSITS AND OTHER ASSETS 88,025 80,747 ------------- ------------- TOTAL ASSETS $ 4,519,533 $ 5,599,711 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Expenses $ 1,432,678 $ 2,433,982 Deferred Revenue 105,537 102,987 Capital Lease Obligations, Current 52,743 14,492 ------------- ------------- TOTAL CURRENT LIABILITIES 1,590,958 2,551,461 LONG-TERM LIABILITIES: Capital Lease Obligations, Long-Term 40,309 33,307 Long-Term Note Payable - Affiliate 865,954 914,954 Deferred Rent 66,595 - ------------- ------------- TOTAL LONG-TERM LIABILITIES 972,858 948,261 ------------- ------------- TOTAL LIABILITIES 2,563,816 3,499,722 COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY Common Stock, $0.01 Par Value - 25,000,000 132,270 131,409 Shares Authorized; Shares issued and outstanding: 13,226,965 and 13,140,893, respectively Additional Capital 12,208,113 12,192,973 Accumulated Deficit (10,384,666) (10,221,151) Foreign Currency Translation Adjustment - (3,242) ------------- ------------- Total Stockholders' Equity 1,955,717 2,099,989 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,519,533 $ 5,599,711 ============= =============
The accompanying "Notes to Consolidated Financial Statements" are an integral part of these consolidated financial statements COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended Nine months ended March 31, March 31, --------------------------- ---------------------------- 2003 2002 2003 2002 ----------- ---------- ------------ ------------ Revenues $ 2,287,394 $ 2,901,678 $ 7,149,016 $ 9,563,537 Cost of Revenues 861,959 1,001,164 2,604,756 3,078,153 ----------- ---------- ------------ ------------ Gross Profit 1,425,435 1,900,514 4,544,260 6,485,384 Operating Expenses Technical Operations & Support 404,173 530,507 1,295,378 1,698,920 Product Development 71,394 82,710 200,130 285,514 Sales and Marketing 216,757 351,370 756,116 1,042,344 General and Administrative 570,175 1,101,204 1,444,867 2,999,641 Stock-based Compensation - - 2,100 6,678 Depreciation and Amortization 303,624 297,583 911,292 801,035 ----------- ---------- ------------ ------------ Total Operating Expenses 1,566,123 2,363,374 4,609,883 6,834,132 Operating (Loss) (140,688) (462,860) (65,623) (348,748) Other (Expense)/Income Interest Expense (25,441) (23,298) (77,139) (70,421) Other (Expense)/Income (1,903) 2,488 (20,262) 8,288 ----------- ---------- ------------ ------------ Other (Expense)/Income, net (27,344) (20,810) (97,401) (62,133) (Loss) Before Income Taxes (168,032) (483,670) (163,024) (410,881) Income Taxes - - 491 425 ----------- ---------- ------------ ------------ Net (Loss) $ (168,032) $ (483,670) $ (163,515) $ (411,306) =========== ========== ============ ============ Basic (Loss) Per Common Share $ (0.01) $ (0.04) $ (0.01) $ (0.04) =========== ========== ============ ============ Weighted Average Number of Common Shares 13,226,965 11,659,409 13,169,902 10,767,801 =========== ========== ============ ============ Diluted (Loss) Per Common Share $ (0.01) $ (0.04) $ (0.01) $ (0.04) =========== ========== ============ ============ Weighted Average Number of Shares 13,226,965 11,659,409 13,169,902 10,767,801 Assuming Dilution =========== ========== ============ ============
The accompanying "Notes to Consolidated Financial Statements" are an integral part of these consolidated financial statements COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended March 31, ------------------------------------ 2003 2002 --------------- -------------- Cash Flows from Operating Activities: Net (Loss) $ (163,515) $ (411,306) Adjustments to reconcile net loss to net cash (used in)/provided by operating activities: Depreciation and Amortization Expense 911,292 801,035 Bad Debt Expense 56,000 373,199 Stock Based Compensation 2,100 6,678 Loss on disposal of assets 14,993 - Foreign currency translation adjustment 7,350 - Changes in Assets and Liabilities: Accounts Receivable 58,748 439,446 Prepaid Expenses and Other Current Assets 49,218 135,408 Deposits and Other Assets (7,278) 8,453 Accounts Payable and Accrued Expenses (935,105) (382,961) Deferred Revenue 2,550 (146,885) --------------- --------------- Net Cash (used in)/provided by Operating Activities (3,647) 823,067 Cash Flows from Investing Activities: Purchases of Property and Equipment (223,030) (443,806) --------------- --------------- Net Cash (used in) Investing Activities (223,030) (443,806) Cash Flows from Financing Activities: Repayments on Note Payable - Affiliate (49,000) (27,000) Repayments of Capital Lease Obligations (30,733) - Issuance of Stock under Employee Stock Purchase Plan 13,901 17,965 Proceeds from Exercise of Stock Options - 317,823 --------------- --------------- Net Cash (used in)/provided by Financing Activities (65,832) 308,788 --------------- --------------- Effect of Exchange Rate Changes on Cash - (3,274) --------------- --------------- Net (Decrease)/Increase in Cash and Cash Equivalents (292,509) 684,775 Cash and Cash Equivalents at Beginning of Period 860,548 367,493 --------------- --------------- Cash and Cash Equivalents at End of Period $ 568,039 $ 1,052,268 =============== ===============
The accompanying "Notes to Consolidated Financial Statements" are an integral part of these consolidated financial statements COMTEX NEWS NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 2003 1. Basis of Presentation The accompanying interim consolidated financial statements of Comtex News Network, Inc. (the "Company" or "Comtex") and its wholly owned subsidiary, nFactory Comtex, S.L., are unaudited, but in the opinion of management reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at June 30, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002 ("2002 Form 10-K"), filed with the Securities and Exchange Commission on September 30, 2002. Effective December 31, 2002, the Company reincorporated as a Delaware Corporation. Its Certificate of Incorporation authorizes a total number of shares of all classes of stock of 30,000,000, consisting of 5,000,000 shares of preferred stock and 25,000,000 shares of common stock. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statements. Other intangible assets continue to be amortized over their useful lives. The Company applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. Application of the non-amortization provisions of the Statement did not result in a material change in net income. In June 2002, the FASB issued Statement No. 146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs in a Restructuring). SFAS 146 specifies that a liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability in Concepts Statement 6, Elements of Financial Statements, is met. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company implemented SFAS 146 in October 2002 related to the termination of nFactory operations, as discussed below. In December 2002, the FASB issued Statement No. 148 (SFAS 148), Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS 148 amends FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS 123's fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS 148's amendment of the transition and annual disclosure requirements of SFAS 123 are effective for fiscal years ending after December 15, 2002 and are not expected to have a material impact on the Company's annual financial statements. SFAS 148's amendment of the disclosure requirements of Opinion 28 is effective for financial reports for interim periods beginning after December 15, 2002. The Company has implemented the interim disclosure requirements in the quarter ending March 31, 2003. For the nine months ended March 31, 2003, nFactory Comtex, S.L., the Company's wholly owned subsidiary in Madrid, Spain, incurred expenses of approximately $144,000 with minimal revenue generated. Due to the negative cash flow from these operations and the lack of sales projected from the European market, the Company terminated the operations of nFactory Comtex as of December 31, 2002. The Company has transitioned the customer accounts to U.S. account representatives. The subsidiary will remain incorporated for future operations should market opportunities warrant. The termination benefits associated with the shutdown of nFactory Comtex were approximately $44,000 including the termination of all three employees in the Madrid office. The costs other than termination benefits consisted of approximately $13,000 in other expense related to the disposal of assets and approximately $7,000 in foreign currency translation adjustment. The Company has designated the Euro as the functional currency of its wholly owned subsidiary in Spain. Accordingly, assets and liabilities are translated from the Euro into U.S. dollars at the end of period exchange rate, and revenues and expenses are translated at average monthly exchange rates. Foreign currency translation gains and losses were accumulated in stockholders' equity and reflected as a component of other comprehensive income or loss until the foreign operations were terminated. The accumulated translation adjustment attributable to the foreign entity was removed from stockholders' equity and reported as a loss on the termination of nFactory operations at December 31, 2002. Total comprehensive loss for the three and nine months ended March 31, 2003 was approximately $168,000 and $164,000, respectively. The financial statements included with this quarterly report present the consolidated financial results of Comtex and its subsidiary through March 31, 2003. Certain amounts for the three and nine months ended March 31, 2002, and as of June 30, 2002, have been reclassified to conform to the presentation as of and for the three and nine months ended March 31, 2003. 2. Earnings per Share The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Nine Months Ended March 31, March 31, 2003 2002 2003 2002 ------------- ------------- ------------- -------------- Numerator: Net (Loss) $ (168,032) $ (483,670) $ (163,515) $ (411,306) ============= ============= ============= ============== Denominator: Denominator for basic earnings per share - weighted average shares 13,226,965 11,659,409 13,169,902 10,767,701 Effect of dilutive securities: Stock Options - - - - ------------- ------------- ------------- -------------- Denominator for diluted 13,226,965 11,659,409 13,169,902 10,767,701 earnings per share ============= ============= ============= ============== Basic (Loss) Per Share $ (0.01) $ (0.04) $ (0.01) $ ( 0.04) Diluted (Loss) Per Share $ (0.01) $ (0.04) $ (0.01) $ ( 0.04)
3. Stock-based Compensation The Company applies the intrinsic-value-based method to account for its employee stock option plan. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation: Three Months Ended Nine Months Ended March 31, March 31, 2003 2002 2003 2002 ------------ ------------ ------------- ------------- Net (Loss), as reported $ (168,032) $ (483,670) $ (163,515) $ (411,306) Deduct: Total stock-based compensation expense determined under fair value based method (SFAS No. 123) for all awards, net of related tax effects 136,543 74,460 450,271 402,532 ------------ ------------ ------------- ------------- Pro Forma Net (Loss) $ (304,575) $ (558,130) $ ( 613,786) $ (813,838) ============ ============ ============= ============= Basic (Loss) Per Share, as reported $ (0.01) $ (0.04) $ (0.01) $ ( 0.04) Diluted (Loss) Per Share, as reported $ (0.01) $ (0.04) $ (0.01) $ ( 0.04) Basic (Loss) Per Share, pro forma $ (0.02) $ (0.05) $ (0.05) $ ( 0.08) Diluted (Loss) Per Share, pro forma $ (0.02) $ (0.05) $ (0.05) $ ( 0.08)
4. Income Taxes The provision for income taxes is limited to the liability for alternative minimum tax, as the majority of income for Federal and state tax purposes has been offset by net operating loss and investment tax credit carryforwards. 5. Commitments and Contingencies The Company is involved in routine legal proceedings occurring in the ordinary course of business, which in the aggregate are believed by management to be immaterial to the Company's financial condition. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Form 10-Q and the consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended June 30, 2002 filed with the Securities and Exchange Commission on September 30, 2002. Historical results and percentage relationships among any amounts in the Consolidated Financial Statements are not expected to be indicative of trends in operating results for any future period. Forward-looking Statements This Form 10-Q 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. These statements are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. In particular, the risks and uncertainties include those described in our annual report on Form 10-K for the year ended June 30, 2002 and in other periodic Securities and Exchange Commission filings. These risks and uncertainties include, among other things, the consolidation of the Internet news market; competition within our markets; the financial stability of our customers; maintaining a secure and reliable news-delivery network; maintaining relationships with key content providers; attracting and retaining key personnel; the volatility of our Common Stock price; successful marketing of our services to current and new customers; and operating expense control. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise the information contained in this Form 10-Q, whether as a result of new information, future events or circumstances or otherwise. RESULTS OF OPERATIONS Comparison of the three months ended March 31, 2003, to the three months ended March 31, 2002 During the three months ended March 31, 2003, we incurred an operating loss of approximately $141,000, compared to an operating loss of approximately $463,000 during the three months ended March 31, 2002. We reported a net loss of approximately $168,000 during the three months ended March 31, 2003, compared to a net loss of approximately $484,000 for the three months ended March 31, 2002. As discussed below, the decrease in operating and net loss is due primarily to costs associated with the Infospace lawsuit incurred in fiscal year 2002, as well as a decrease in total operating expenses. The decrease in operating and net loss was partially offset by a decrease in gross revenues and in gross profit margins. Revenues consist primarily of royalty revenues and fees from the licensing of content products to information distributors. During the three months ended March 31, 2003, total revenues were approximately $2,287,000, or approximately $614,000 (21%) less than the total revenues for the three months ended March 31, 2002. The decline in revenues is the direct result of business closures and consolidation among clients, primarily in the Internet and personal investor markets. Our cost of revenues consists primarily of content license fees and royalties to information providers, as well as data communication costs for the delivery of our products to customers. The cost of revenues for the three months ended March 31, 2003 was approximately $862,000 or approximately $139,000 (14%) less than the cost of revenues for the three months ended March 31, 2002. The decrease in cost is primarily due to the decrease in content royalties based on decreased revenues for the period. The decrease in content royalties is limited by fees required to be paid to certain information providers and, therefore, does not directly track the decrease in revenues. The gross profit for the three months ended March 31, 2003 was approximately $1,425,000 or approximately $475,000 (25%) less than the gross profit for the same period in the prior year. The gross profit as a percentage of revenue declined for the three months ended March 31, 2003 to approximately 62% from approximately 65% for the three months ended March 31, 2002. The decline is based on the decrease in revenues with a lesser corresponding decrease in content royalties as discussed above. Total operating expenses for the three months ended March 31, 2003 were approximately $1,566,000, representing an approximately $797,000 (34%) decrease in operating expenses from the three months ended March 31, 2002. This decrease in expenses resulted from decreases in technical operations and support, product development, sales and marketing and general and administrative expenses, partially offset by an increase in depreciation and amortization expenses. Technical operations and support expenses during the three months ended March 31, 2003 decreased approximately $126,000 (24%) from these expenses in the three months ended March 31, 2002. Product development expenses decreased by approximately $11,000 (14%) for the three months ended March 31, 2003 compared to the three months ended March 31, 2002. Product development activities include quality assurance, enhancements to our products and the development of proprietary news products. Sales and marketing expenses decreased by approximately $135,000 (38%) for the three months ended March 31, 2003 compared to the three months ended March 31, 2002. These decreases are the result of decreases in personnel, decreased computer support costs and decreased commission expense as a result of the decrease in revenues compared to the same quarter in the previous year. General and administrative expenses for the three months ended March 31, 2003 were approximately $531,000 (48%) less than these expenses during the three months ended March 31, 2002. This decrease in expenses resulted primarily from reduced legal and accounting costs related to the Infospace lawsuit. In addition, the decrease is the result of reductions in consulting costs related to business development opportunities spent in the prior year's quarter and a reduction in bad debt expense due to more successful collection efforts and reduced revenues. Depreciation and amortization expense for the three months ended March 31, 2003 was approximately $6,000 (2%) higher than the expense during the same period in the prior year. The increase was due to additional capital expenditures related to increasing the capacity and redundancy of the production systems over the past twelve months. Other expense, net of other income, for the three months ended March 31, 2003 increased approximately $7,000, or 31%, compared to the three months ended March 31, 2002. The increase was primarily due to interest expense on capital leases and reduced interest earned on decreased cash balances. Comparison of the nine months ended March 31, 2003 to the nine months ended March 31, 2002 During the nine months ended March 31, 2003, we incurred an operating loss of approximately $66,000, compared to an operating loss of approximately $349,000 during the nine months ended March 31, 2002. We reported a net loss of approximately $164,000 during the nine months ended March 31, 2003, compared to a net loss of approximately $411,000 for the nine months ended March 31, 2002. As discussed below, the decrease in operating and net loss is due primarily to the recovery of approximately $394,000 in accrued costs at June 30, 2002 in settlement of the Infospace lawsuit, as well as a decrease in total operating expenses. The decrease in operating and net loss was partially offset by a decrease in gross revenues and in gross profit margins. Revenues consist primarily of royalty revenues and fees from the licensing of content products to information distributors. During the nine months ended March 31, 2003, total revenues were approximately $7,149,000 or approximately $2,415,000 (25%) less than the total revenues for the nine months ended March 31, 2002. The decline in revenues is the direct result of business closures and consolidation among clients, primarily in the Internet and personal investor markets. Our cost of revenues consists primarily of content license fees and royalties to information providers, as well as data communication costs for the delivery of our products to customers. The cost of revenues for the nine months ended March 31, 2003 was approximately $2,605,000 or approximately $473,000 (15%) less than the cost of revenues for the nine months ended March 31, 2002. The decrease in cost is primarily due to the decrease in content royalties based on decreased revenues for the period. The decrease in content royalties is limited by minimum fees required to be paid to certain information providers and, therefore, does not directly track the decrease in revenues. The gross profit for the nine months ended March 31, 2003 was approximately $4,544,000 or approximately $1,941,000 (30%) less than the gross profit for the same period in the prior year. The gross profit as a percentage of revenue declined for the nine months ended March 31, 2003 to approximately 64% from approximately 68% for the nine months ended March 31, 2002. The decline is based on the decrease in revenues with a lesser corresponding decrease in content royalties as discussed above. Total operating expenses for the nine months ended March 31, 2003 were approximately $4,610,000, representing an approximately $2,224,000 (33%) decrease in operating expenses from the nine months ended March 31, 2002. This decrease in expenses resulted from decreases in technical operations and support, product development, sales and marketing, and general and administrative expenses, partially offset by an increase in depreciation and amortization expense. Technical operations and support expenses during the nine months ended March 31, 2003 decreased approximately $404,000 (24%) from these expenses in the nine months ended March 31, 2002. Product development expenses decreased by approximately $85,000 (30%) for the nine months ended March 31, 2003, compared to the same period in the prior fiscal year. Sales and marketing expenses decreased by approximately $286,000 (27%) for the nine months ended March 31, 2003 compared to the nine months ended March 31, 2002. These decreases are the result of a decrease of personnel across departments, decreased computer related expenses and decreased commission expense as a result of the decrease in revenues compared to the same period in the previous year. General and administrative expenses for the nine months ended March 31, 2003 were approximately $1,555,000 (52%) less than these expenses during the nine months ended March 31, 2002. This decrease in expenses resulted from the recovery of approximately $394,000 in accrued costs at June 30, 2002 in settlement of the Infospace lawsuit, as well as reduced legal and accounting costs related to the case. In addition, the decrease is the result of reductions in consulting costs related to business development opportunities and a reduction in bad debt expense due to more successful collection efforts and reduced revenues. Stock-based compensation of approximately $2,000 for the nine months ended March 31, 2003 represents options granted to a consultant for services rendered during the period. In connection with the transfer of stock options from a member of the Board of Directors to certain employees, we recorded stock- based compensation of approximately $7,000 during the nine months ended March 31, 2002. Depreciation and amortization expense for the nine months ended March 31, 2003 was approximately $110,000 (14%) higher than the expense during the same period in the prior year. The increase was due to additional capital expenditures related to increasing the capacity and redundancy of the production systems over the past twelve months. Other expense, net of other income, for the nine months ended March 31, 2003 increased approximately $35,000 (57%) compared to the nine months ended March 31, 2002 primarily due to the disposal of nFactory Comtex assets and the foreign currency translation adjustment, as well as interest expense on capital leases and reduced interest earned on decreased cash balances. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For the nine months ended March 31, 2003, our operations resulted in an operating loss of approximately $66,000 and a net loss of approximately $164,000. At March 31, 2003, we had working capital of approximately $22,000, as compared with a working capital deficit of approximately $478,000 at June 30, 2002. The increase in working capital was due primarily to the recovery of approximately $394,000 in accrued expenses at June 30, 2002 related to settlement of the Infospace lawsuit. We had net stockholders' equity of approximately $1,956,000 at March 31, 2003, as compared to net stockholders' equity at June 30, 2002 of approximately $2,100,000. The decrease in stockholders' equity was primarily due to the net loss incurred during the nine months ended March 31, 2003. For the nine months ended March 31, 2003, operating activities utilized approximately $4,000 in cash. We had cash of approximately $568,000 at March 31, 2003, compared to approximately $861,000 at June 30, 2002. We made capital expenditures of approximately $223,000 during the nine months ended March 31, 2003, primarily for software licensing and the development of software for internal use. These investments improve our product capabilities and reliability, and our ability to meet future content and client processing requirements. In September 2002, we obtained a two-year financing agreement for $76,000 to purchase software and related maintenance with HP Financial Services that expires August 2004. Financing activities during the nine months ended March 31, 2003 utilized approximately $66,000 in cash. For the nine months ended March 31, 2003, nFactory Comtex, S.L., the Company's wholly owned subsidiary in Madrid, Spain, incurred expenses of approximately $144,000 with minimal revenue generated. Due to the negative cash flow from these operations and the lack of sales projected from the European market, the Company terminated the operations of nFactory Comtex as of December 31, 2002. The Company has transitioned the customer accounts to U.S. account representatives. The subsidiary will remain incorporated for future operations should market opportunities warrant. The financial statements included with this quarterly report present the consolidated financial results of Comtex and its subsidiary. The Company's future contractual obligations and commitments as of March 31, 2003 are as follows: Amounts Due by Period: 2008 and 2003 2004 2005 2006 2007 thereafter ---------------------------------------------------------------- Operating Leases $143,706 $490,145 $484,019 $498,540 $513,496 $617,493 Capital Leases 16,167 64,668 24,818 - - - Note Payable - - - - - 879,954 ---------------------------------------------------------------- Total $159,873 $554,813 $508,837 $498,540 $513,496 $1,497,447
Currently we are dependent on our cash reserves to fund operations; however, assuming stability in the financial and corporate markets - our primary markets, we believe continuing control of operating expenses and a focus on revenue generation in both our existing customer base and potential new markets will generate positive operating cash flows to meet our obligations on a short-term basis. Our ability to meet our liquidity needs on a long-term basis depends on our ability to generate sufficient revenues and cash to cover our current obligations and to pay down our current and long-term debt obligations. Any further corporate consolidation or market deterioration affecting our customers could limit our ability to generate such revenues. No assurance may be given that we will be able to maintain the revenue base or the size of profitable operations that may be necessary to achieve our liquidity needs. Subsequent to quarter-end, we entered into a separation agreement with the former President and CEO of the Company. The terms of the agreement require even payments over approximately ten months in an amount equal to his final monthly gross salary in exchange for short-term consulting, a one year non-compete agreement, waiver of his existing employment agreement which required seven months of continuing salary, and waiver of his right to a lump-sum bonus payment that equaled approximately three and one-half months salary. EBITDA, as defined below, was approximately $163,000 for the three months ended March 31, 2003 compared to a loss of approximately $165,000 for the three months ended March 31, 2002. EBITDA increased approximately 85% to $848,000 for the nine months ended March 31, 2003 compared to $459,000 for the nine months ended March 31, 2002. The increase for the three month period is the result of reduced operating expenses, primarily professional fees related to the Infospace lawsuit. The increase for the nine month period is primarily the result of the recovery of accrued costs related to the Infospace lawsuit settlement as well as decreased operating expenses, excluding stock-based compensation, depreciation and amortization. The increase was partially offset by a decline in revenues and a decrease in gross profit margin. The table below shows the reconciliation from operating loss to EBITDA. Three Months Nine Months Ended March 31, Ended March 31, 2003 2002 2003 2002 --------------------------------------- Reconciliation to EBITDA: Operating Income (Loss) (141) (463) (66) (349) Stock-based compensation - - 2 7 Depreciation and Amortization 304 298 911 801 ---------------------------------------- EBITDA $ 163 $ (165) $ 848 $ 459
EBITDA consists of earnings before interest expense, interest and other income, income taxes, stock-based compensation, depreciation and amortization. EBITDA does not represent funds available for management's discretionary use and is not intended to represent cash flow from operations. EBITDA should also not be construed as a substitute for operating income or a better measure of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles. EBITDA excludes components that are significant in understanding and assessing our results of operations and cash flows. In addition, EBITDA is not a term defined by generally accepted accounting principles, and as a result, our measure of EBITDA might not be comparable to similarly titled measures used by other companies. However, we believe that EBITDA is relevant and useful information, which is often reported and widely used by analysts, investors and other interested parties in our industry. Accordingly, we are disclosing this information to permit a more comprehensive analysis of our operating performance, as an additional meaningful measure of performance and liquidity, and to provide additional information with respect to our ability to meet future debt service, capital expenditure and working capital requirements. See the audited financial statements and notes thereto contained elsewhere in this report for more detailed information. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to various market risks, including changes in foreign currency exchange rates. However, with the shutdown of the Spanish subsidiary, the risk of exchange rate fluctuations has ceased to exist. The impact of currency exchange rate movements as of March 31, 2003 was not material. We do not engage in hedging activities. Item 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days prior to the filing date of this report, that the Company's disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the foregoing evaluation. Part II. Other Information Item 1. Legal Proceedings We are involved in routine legal proceedings occurring in the ordinary course of business, which in the aggregate are believed by management to be immaterial to our financial condition. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information On April 24, 2003, Charles W. Terry resigned from his positions as President and Chief Executive Officer of Comtex News Network, Inc. In addition, Mr. Terry resigned as a member of the Board of Directors as of April 24, 2003. A copy of the Separation Agreement and Release between the Company and Mr. Terry is included as Exhibit 10.1 to this Form 10-Q. On April 25, 2003, the Company announced the appointment of Raymond P. Capece as President and Chief Executive Officer. A copy of the employment agreement between the Company and Mr. Capece is included as Exhibit 10.2 to this Form 10-Q. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.1 Separation Agreement and Release between Comtex News Network, Inc. and Charles W. Terry, effective April 24, 2003. 10.2 Employment Agreement between Comtex News Network, Inc. and Raymond P. Capece, effective April 25, 2003. (b) Reports on Form 8-K On April 25, 2003, the Company filed a current report on Form 8-K reporting the announcement of the appointment of its new President and Chief Executive Officer. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMTEX NEWS NETWORK, INC. (Registrant) Dated: May 15, 2003 By: /S/ RAYMOND P. CAPECE Raymond P. Capece President and Chief Executive Officer (Principal Executive Officer) By: /S/ ROBIN Y. DEAL Robin Y. Deal Vice President, Finance & Accounting (Principal Financial and Accounting Officer) CERTIFICATIONS I, Raymond P. Capece, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Comtex News Network, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /S/ RAYMOND P. CAPECE Raymond P. Capece President and Chief Executive Officer I, Robin Y. Deal, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Comtex News Network, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /S/ ROBIN Y. DEAL Robin Y. Deal Vice President, Finance & Accounting CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Raymond P. Capece, the President and Chief Executive Officer of Comtex News Network, Inc. (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the period ending March 31, 2003 (the "Report"). The undersigned hereby certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of The United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002. Date: May 15, 2003 /S/ RAYMOND P. CAPECE Raymond P. Capece President and Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Robin Y. Deal, the Vice President, Finance and Accounting of Comtex News Network, Inc. (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the period ending March 31, 2003 (the "Report"). The undersigned hereby certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of The United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002. Date: May 15, 2003 /S/ ROBIN Y. DEAL Robin Y. Deal Vice President, Finance & Accounting EX-10.1 3 ex10_1.txt EXHIBIT 10.1 SEPARATION AGREEMENT SEPARATION AGREEMENT AND RELEASE This Separation Agreement and Release ("Separation Agreement") is dated as of April 24, 2003, by and between Comtex News Network, Inc. (the "Employer") and Charles W. Terry (the "Employee"). WHEREAS, Employee entered into an employment agreement with the Employer dated as of October 1, 1998, and as amended by amendments dated October 1, 2001, September 10, 2002, and December 31, 2002 (the "Employment Agreement"); and WHEREAS, Employee has tendered his resignation as President and Chief Executive Officer of Employer effective as of April 24, 2003; and WHEREAS, Employee has tendered his resignation from the Board of Directors of Employer effective as of April 24, 2003. NOW, THEREFORE, in consideration of the promises herein stated and other good and valuable consideration, the receipt and adequacy of which is acknowledged by each of the parties and who intend to be legally bound by this Separation Agreement, the parties state and agree as follows: 1. Termination of Employment Relationship. The parties hereto agree that their employment relationship is terminated as of April 24, 2003, except that the obligations of Employee under Section 4 of the Employment Agreement relating to the covenant not to compete shall continue for a period of twelve (12) months from the date of this Separation Agreement and except that the text in line five of Section 4.2 that reads "in the rental, sale or service of products of the type rented, sold or serviced by the Company or any of its Subsidiaries during the period of Employee's employment with the Company ("Products")" is hereby replaced in its entirety by text that reads "in any business that is a real time news feed aggregator or reseller to companies that integrate real time news with their own proprietary applications." In addition. the obligations of Employee under Section 5 of the Employment Agreement relating to confidential information shall continue in full force and effect. All accrued vacation leave and any unreimbursed business expenses due to Employee through April 24, 2003 will be paid to Employee no later than May 25, 2003. 2. Effect of Resignation. Employer agrees to pay Employee separation payments in an amount equal to ten months Base Salary (as defined in the Employment Agreement), in ten equal monthly installments commencing April 25, 2003, and terminating February 25, 2004. As partial consideration for such separation payments, Employee agrees to be available for telephone consultation on a limited basis for sixty (60) days following the date of this Agreement. In addition, Employer agrees to pay Employee an amount equal to two weeks Base Salary (as defined in the Employment Agreement) by no later than May 2, 2003. Any of the Company's property, other than that described on Schedule 1 hereto, shall be returned to the Company by the close of business April 25, 2003. Employee shall be entitled to elect continuing health care coverage under Employer's health plan, at Employer's expense through the last day of November 2003, subject to the requirements of Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, Internal Revenue Code section 4980B, and subsequent legislation ("COBRA"). In connection with the execution of this Separation Agreement, Employee and Employer hereby waive and release each other from any and all causes of actions, debts, claims and liabilities, whether known or unknown, which either party now has or may have in the future against the other under the Employment Agreement, except as otherwise provided herein. 3. Counterparts. This Separation Agreement may be executed in one or more counterparts, each of which shall be deemed to constitute an original. 4. Governing Law. This Separation Agreement shall be governed by, and interpreted in accordance with, the laws of the Commonwealth of Virginia, without regard to the conflict of law principles thereof. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed in counterparts as of the 24th day of April 2003. COMTEX NEWS NETWORK, INC. By: /S/ STEPHEN W. ELLIS Stephen W. Ellis, Chairman of the Board Acting on Behalf of the Board of Directors EMPLOYEE By: /S/ CHARLES W. TERRY Charles W. Terry SCHEDULE 1 1 Toshiba Laptop: Portege 7200 1 Toshiba Laptop (older than above) 1 Compaq IPAQ model 3650 EX-10.2 4 ex10_2.txt EXHIBIT 10.2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into as of the 25th day of April 2003 (the "Effective Date"), by and between Comtex News Network, Inc., a Delaware corporation (the "Company"), and Raymond P. Capece ("Executive"). Recitals: A. The Company desires to retain Executive as its President and Chief Executive Officer on the terms and conditions hereinafter set forth; and B. Executive desires to commence such employment, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the promises and the mutual covenants set forth herein, the parties hereto agree as follows: 1. Employment and Term. a. Employment. The Company hereby agrees to employ Executive and Executive hereby accepts employment as President and Chief Executive Officer of the Company under the conditions hereinafter specified. b. Term. Subject to earlier termination as provided in Paragraph 5, the initial term of this Agreement shall commence on the Effective Date of this Agreement and end on the date twelve (12) months thereafter; provided, however, this Agreement may be renewed for two successive terms of twelve (12) months each, commencing on the first and second anniversary of the Effective Date. The Board of Directors shall notify Executive in writing of its election to renew this Agreement at least sixty (60) days prior to the expiration of the original or any renewal term. 2. Duties. a. Executive shall serve as President and Chief Executive Officer of the Company. Executive shall perform all of his duties diligently and faithfully, and shall report to the Chairman and the Board of Directors. Executive shall be invited to attend all meetings of the Board of Directors of the Company. Within ninety (90) days of the Effective Date of this Agreement, Executive shall be appointed to the Board of Directors. b. Executive shall at all times devote his entire working time, attention, energies, efforts and skills to the business of the Company, and shall not, directly or indirectly, engage in any other business activity, whether or not for profit, gain or other pecuniary advantages, without the express written permission of the Company. Notwithstanding the foregoing, Executive may serve on the board of directors of any non- competing company and receive compensation therefore, provided he obtains the advance written approval of the Board of Directors of the Company. 3. Compensation. a. Base Salary. The Company shall pay Executive basic compensation of One Hundred Seventy-Five Thousand Dollars ($175,000) per year ("Base Salary"). Such Base Salary shall be payable biweekly. In the event this Agreement is renewed, Executive shall be entitled to an increase in Executive's Base Salary for the applicable renewal term in an amount which is commensurate, on a percentage basis, with the increases, if any, in the base annual salaries awarded to other executive officers of the Company for such period, as determined by the Board of Directors of the Company (and such increase in Base Salary shall become the Base Salary). Any incentive compensation that may be paid to Executive from time to time shall have no impact upon the Base Salary. b. Signing Bonus. As an incentive to enter into this Agreement, the Company shall pay Executive a one-time signing bonus of Ten Thousand Dollars ($10,000.00), less standard withholdings and deductions, payable after thirty (30) days of service under this Agreement. c. Incentive Stock Options. The Company shall grant Executive stock options ("Stock Options") to acquire Six-Hundred Thousand (600,000) common shares of the Company's stock, in accordance with the Company's Stock Option Plan (the "Plan"), with an exercise price per share equal to the Fair Market Value of the common shares as of the date of grant. For this purpose, Fair Market Value equals the average of the trailing 10 day high and low bids (as specified in the Plan). Provided Executive is employed by the Company on the date of vesting, Executive shall vest in such Stock Options pursuant to the following schedule: Length of Service From Effective Date Number of Vested Options 90 Days 150,000 shares 12 Months 150,000 shares 24 Months 150,000 shares 36 Months 150,000 shares Upon the occurrence of any of the following within one of the time periods listed under Length of Service From Effective Date in the table immediately above, the unvested options only for the number of shares associated with such specific time period shall accelerate as to vesting and shall be deemed vested at the date of occurrence of said event: (i) Executive is required to work more than 50 miles outside of the current Company headquarters, located at Alexandria, Virginia, on a regular basis; (ii) Change of Control: A "Change of Control" shall have occurred if: (a) Any "person" within the meaning of Section 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than the Company, a subsidiary or "affiliate" as defined under the Exchange Act, any employee benefit plan sponsored by the Company or any subsidiary of the Company, becomes the "beneficial owner" as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of 51% or more of the combined voting power of the securities of the Company entitled to vote in an election of directors to the Board, and Executive's employment with the Company is terminated by the Company at any time during the remainder of such period during which vesting would otherwise have occurred but for such termination (the "Protection Period"); or (b) A merger or equivalent combination occurs after which 51% or more of the voting stock of the surviving Company is held by persons other than former stockholders of the Company, and Executive's employment with the Company is terminated by the Company at any time during the Protection Period; or (c) The sale, assignment, transfer or other disposition of assets of the Company having a value in excess of 50% of the total assets of the Company, and Executive's employment with the Company is terminated by the Company at any time during the Protection Period. d. Incentive Cash Bonus. The Company shall pay Executive an annual incentive cash bonus pursuant to the formula attached hereto as Schedule A. Within 45 days following each fiscal quarter end, the Company will estimate the cumulative incentive cash bonus due to Executive for the fiscal year-to- date, less a reserve amount equal to 20% of such amount (the "Estimated Cumulative Incentive Cash Payment"), except for the fourth fiscal quarter whereupon no such reserve amount shall be deducted. Within 10 days thereafter, the Company will pay to the Executive the Estimated Cumulative Incentive Cash Payment, less the total of all prior Estimated Cumulative Incentive Cash Payments made thus far for the fiscal year in question. For any year that does not fall entirely within the term of employment, the bonus for that year shall be prorated according to the following formula: the bonus for that entire year, calculated according to the formula attached hereto as Schedule A, multiplied by a fraction, the numerator of which shall be the number of days in that year that fall within the term of employment and the denominator of which shall be 365. If Executive's employment be terminated at other than a fiscal year end, the Incentive Cash Bonus due to Executive shall be calculated by replacing the annual Plan amounts stipulated in Schedule A with the year-to-date Plan amount that corresponds to the month ended immediately preceding such date of termination (the Year-to-Date Plan) and comparing such Year-to-Date Plan to the Company's actual revenue and profitability performance, as stipulated in Schedule A, through the comparable month end immediately preceding such date of termination. The Executive need not be employed by the Corporation at the time of payment in order to receive any bonus to which the Executive is otherwise entitled pursuant to the terms of this Paragraph 3d. e. Reimbursement of Reasonable Expenses. The Company shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by Executive performing his obligations under this Agreement. 4. Benefits. a. Retirement and/or Pension Plan(s). Executive shall be entitled to participate in any retirement and/or pension plan(s) offered to the Company's employees generally in accordance with the terms of such plan(s), as they may be modified at the Company's discretion from time to time. b. Insurance. Executive shall be entitled to participate in any health, medical, life and disability insurance plans offered to the Company's employees generally in accordance with the terms of such plan(s), as they may be modified in their application to all employees at the Company's discretion from time to time. c. Paid Sick and Personal Leave. Executive shall be entitled to a maximum of ten (10) days of paid sick leave per year, which shall accrue in accordance with the Company's policy applicable to employees generally. Executive shall also accrue two (2) additional personal days per calendar year. d. Paid Vacation. Executive shall be entitled to four (4) weeks of paid vacation during each calendar year; however, in no event shall Executive use more than two contiguous weeks at any one time. Accrued, but unused, vacation may be carried over from one year to the next in accordance with the policy in effect for the Company employees in general. 5. Termination of Employment by the Company. a. Termination for Cause. The employment of Executive under this Agreement may be terminated for "Cause" by the Company at any time by action of the Board upon the occurrence of any one or more of the following events: (i) Executive's fraud, dishonesty, gross negligence or willful misconduct in the performance of his duties hereunder, including willful failure to perform such duties as may properly be assigned him hereunder; or (ii) Executive's material breach of any provision of this Agreement. Executive shall be notified in writing of such termination, which notification shall specify the grounds cited by the Board for such termination for cause. Any termination by reason of the foregoing shall not be in limitation of any right or remedy which the Company may have under this Agreement or otherwise. b. Termination Without Cause. (i) The Company may terminate Executive's employment without cause and at any time. Executive shall be notified in writing of such termination on or prior to the effective date of such termination. (ii) If Executive's employment is terminated without cause, and Executive waives all claims against the Company relating to or arising out of his employment or the termination of his employment by executing a general release of such claims, Executive shall receive, as severance pay, an amount equal to his Base Salary divided by twelve (12) (as defined, his "Monthly Base Salary") and multiplied by the appropriate multiple set forth below for Executive's length of service at time of termination: Length of Service Severance Compensation Less than 90 Days Zero 90 Days to less than First 6 Months Two First 6 Months to less than 12 Months Three First Year to less than 24 Months Five Second Year to less than 36 Months Six Such amount shall represent the agreed-upon liquidated damages for any loss, cost, expense or damages suffered as a result of such termination, as well as consideration for Executive's execution of a General Release of all claims against the Company. The Company shall pay such amount to Executive on a bi-weekly basis, less standard withholdings and deductions, and in an amount equal to the Executive's then current rate of Base Pay until such time as the severance obligation due to the Executive by the Company has thereby been extinguished, with the exception that the Executive may elect to receive up to 100% of this payment in a lump sum not later than 30 days following the date of termination, in the event that the lump-sum payment shall be used exclusively for the purposes of exercising vested stock options in the Corporation. c. Resignation from Board. Executive agrees to resign from the Board of Directors of the Company immediately upon his termination of employment, whether such termination is voluntary or involuntary, with or without cause. 6. Protection of the Company. a. Non-Compete. To induce the Company to enter into this Agreement, Executive agrees, during the term hereof and for a period of one year after the termination of his employment for any reason, not to directly or indirectly engage or be interested (as owner, partner, shareholder, director, employee, agent, consultant or otherwise), with or without compensation, in the rental, sale, or service of products of the type rented, sold or serviced by the Company ("Products") within any geographical area in which the Company or any of its subsidiaries is conducting business or actively planning to conduct business as of the date of such termination ("Subject Area"). Executive acknowledges that the provisions of this Paragraph are reasonable and necessary for the protection of the Company and its subsidiaries and that the Company and its subsidiaries will be irrevocably damaged if such provisions are not specifically enforced. Accordingly, Executive agrees that, in addition to any other remedy to which the Company may be entitled, the Company shall be entitled to seek and obtain injunctive relief from a court of competent jurisdiction for the purposes of restraining it from any actual or threatened breach of such provisions, without bond or other security being required. The provisions of this section shall survive the expiration or earlier termination of this Agreement. b. In the event that a court of competent jurisdiction finds Paragraph 6a. or any of its restrictions, to be ambiguous, unenforceable, and/or invalid, Executive and the Corporation agree that such court shall read Paragraph 6a. as a whole and interpret the restriction(s) at issue to be enforceable and valid to the maximum extent as allowed by law for the protection of the Corporation's business interests. c. If the court declines to enforce this Agreement pursuant to Paragraph 6b. above, the Corporation and Executive agree that Paragraph 6a. will be automatically modified to provide the Corporation with the maximum protection of the Corporation's business interests as allowed by law and to be bound by Paragraph 6a. as modified. d. If any provision of Paragraph 6a. shall nonetheless be declared ambiguous, unenforceable or invalid, the remainder of Paragraph 6a. shall remain in full force and effect, and Paragraph 6a. shall remain in full force and effect, and Paragraph 6a. shall be read as if the ambiguous, unenforceable or invalid provision was not contained herein. e. Confidential Information. As used herein, "Confidential Information" means all technical and business information (including financial statements and related books and records, personnel records, customer lists, arrangements with customers and suppliers, manuals and reports) of the Company and its subsidiaries (whether such information is owned by, licensed to or otherwise possessed by the Company or any subsidiary), whether patentable or not, which is of confidential, trade secret and/or proprietary character and which is either developed by Executive (alone or with others) or to which Executive has had access during his employment. "Confidential Information" shall include, but is not limited to, information of a technical or business nature such as ideas discoveries, inventions, improvements, trade secretes, know-how, manufacturing processes, specifications, writings and other works of authorship, computer programs, financial figures and reports, marketing plans, customer lists and data, and/or business plans or data which relate to the actual or anticipated business of the Company or any subsidiary or its actual or anticipated areas of research and development. "Confidential Information" shall also include, but is not limited to, confidential evaluations of, and the confidential use or non-use by the Company or any of its subsidiaries of, technical or business information in the public domain. Executive shall, both during and after his employment with the Company, protect and maintain the confidential, trade secret and/or proprietary character of all Confidential Information. Executive shall not, during or after termination of his employment, directly or indirectly, use (for himself or another) or disclose any Confidential Information, for so long as it shall remain proprietary or protectible as confidential or trade secret information, except as may be necessary for the performance of his duties under this Agreement. Executive shall deliver promptly to the Company, at the termination of his employment, or at any other time at the Company's request, without retaining any copies, all documents and other material in his possession relating, directly or indirectly, to any Confidential Information. Each of Executive's obligations hereunder shall also apply to the confidential, trade secret and proprietary information learned or acquired by him during his employment from others with whom the Company or any subsidiary has a business relationship. f. The provisions of this Paragraph shall survive the expiration or earlier termination of this Agreement. 7. Death or Incapacitation. In the event that Executive dies or, due to a physical or mental impairment, becomes unable to perform the essential functions of his position with or without reasonable accommodation, this Agreement shall be deemed terminated and Executive or his estate, as the case may be, shall be entitled to no further salary, compensation or benefits hereunder, except (i) any unpaid salary, incentive payments and vacation accrued and earned by Executive up to and including the date of such termination, and (ii) any disability, life insurance or other benefits to which Executive or his estate may be entitled on the date of such termination in accordance with the terms and conditions of any applicable benefit plan(s) as set forth in official plan documents. 8. Assignment. This Agreement is a personal service agreement and neither party shall have the right to assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party. 9. Notices. All notices required or permitted hereunder shall be in writing and shall be deemed properly given if delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested. If mailed to the Company, such notices shall be sent to their principal place of business, attention: Chairman of the Board, or at such other address as the Company may hereafter designate in writing to Executive. If mailed to Executive, such notices shall be addressed to him at his home address last known on the records of the Company, or at such other address as Executive may hereafter designate in writing to the Company. 10. Successors Bound. This Agreement shall bind and inure to the benefit of the parties hereto and their respective heirs, personal representatives, estates and permitted successors and assigns. 11. Waiver. No provision hereof may be waived, except by a written instrument signed by the party against whom such waiver is sought to be enforced. The failure or waiver of either party hereto at any time, or from time to time, to require performance by the other party of such other party's obligation hereunder, shall not deprive that party of the right to insist upon strict adherence to such obligation at any subsequent time. Each party hereto agrees that any waiver of its rights arising out of any breach of this Agreement by the other party shall not be construed as a waiver of any subsequent breach. 12. Amendment. No provision hereof may be altered or amended, except by a written instrument signed by the party against whom such alteration or amendment is to be enforced. 13. Governing Law. The parties agree that this Agreement shall in all respects be construed, interpreted and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflict of laws thereof. 14. Arbitration. Whenever a "dispute" arises between the parties concerning this Agreement or their employment relationship (other than a dispute arising under Paragraph 6), including without limitation the termination thereof, the parties shall use their best efforts to resolve the "dispute" by mutual agreement. If such a "dispute" cannot be so resolved, it shall be submitted to final and binding arbitration to the exclusion of all other avenues of relief. For the purposes of this paragraph, the term "dispute" means all controversies or claims relating to terms, conditions or privileges of employment, including without limitation claims for breach of contract, discrimination, harassment, wrongful discharge, misrepresentation, defamation, emotional distress or any other personal injury, but excluding claims for unemployment compensation or worker's compensation. The dispute shall be submitted to the American Arbitration Association ("AAA") at an office located in the Commonwealth of Virginia and adjudicated in accordance with AAA's Rules for Commercial Arbitration then in effect. The decision of the Arbitrator must be in writing and shall be final and binding on the parties, and judgment may be entered on the arbitrator's award in any court having jurisdiction thereof. The expenses of the arbitration shall be borne equally by the parties, and each party shall be responsible for his or its own costs and attorneys' fees. The Arbitrator shall be deemed to possess the powers to issue mandatory orders and restraining orders in connection with such arbitration; provided, however, that nothing in this paragraph shall be construed so as to deny the Company the right and power to seek and obtain injunctive relief in a court of equity for any breach or threatened breach by Executive of any of the provisions contained in Paragraph 6 of this Agreement. This paragraph shall survive the termination of this Agreement. 15. Severability. In the event that any provision of this Agreement conflicts with the law under which this Agreement is to be construed, or if any such provision is held invalid or unenforceable by a court of competent jurisdiction or an arbitrator, such provision shall be deleted from this Agreement and the Agreement shall be construed to give full effect to the remaining provisions thereof. 16. Headings and Captions. The paragraph headings and captions contained in this Agreement are for convenience only and shall not be construed to define, limit or affect the scope or meaning of the provisions hereof. 17. Entire Agreement. This Agreement contains and represents the entire agreement of the parties and supersedes all representations or understandings, oral or written, express or implied with respect to the subject matter hereof. This Agreement may not be modified or amended in any way unless in writing signed by both Executive and the Chairman of the Board of the Company. No representation, promise or inducement has been made by either party hereto that is not embodied in this Agreement, and neither party shall be bound or liable for any alleged representation, promise or inducement not specifically set forth herein. IN WITNESS WHEREOF, the parties have executed this Employment Agreement effective on the date and year first written above. COMTEX NEWS NETWORK, INC. By: /S/ STEPHEN W. ELLIS Stephen W. Ellis Chairman of the Board EXECUTIVE By: /S/ RAYMOND P. CAPECE Raymond P. Capece Schedule A Incentive Cash Components (where X, Y and Z are > 0 only): Payable within 30 days Bonus Formula after FQE (20% reserve withheld only for Q1 - Q3) A. Where W = Total Revenue: If Act. W = Plan W $65,000; If 90% Plan W = Act. W < 100% Plan W $52,000 (80%); If Act. W < 90% Plan Zero. B. Revenue Above Plan from Existing Products: 2.0% times X For X = Act. Rev. less Plan Rev. C. Revenue Above Plan from New Products: 3.5% times Y For Y = Act. Rev. less Plan Rev. D. Total EBITDA: 4.5% times Z. For Z = Act. EBITDA less Plan EBITDA.
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