-----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, SY5wvJdpz5n8Kf81vzC01PLhvlbZDQHFJT2tG+fWGhwWUYuMZMD2OAku0C7nTU5N ce/eoWJtI6llQh1HgTfFfA== 0000943374-04-001068.txt : 20041115 0000943374-04-001068.hdr.sgml : 20041115 20041115120028 ACCESSION NUMBER: 0000943374-04-001068 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 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: 041142890 BUSINESS ADDRESS: STREET 1: 625 N. WASHINGTON ST. STREET 2: STE 301 CITY: ALEXANDRIA STATE: VA ZIP: 22314 BUSINESS PHONE: 703-820-2000 MAIL ADDRESS: STREET 1: 625 N. WASHINGTON ST STREET 2: STE 301 CITY: ALEXANDRIA STATE: VA ZIP: 22314 FORMER COMPANY: FORMER CONFORMED NAME: COMTEX SCIENTIFIC CORP DATE OF NAME CHANGE: 19920703 10-Q 1 form10q_111204.txt 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 September 30, 2004 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.) 625 N. Washington Street Suite 301 Alexandria, Virginia 22314 (Address of principal executive offices) (703) 820-2000 Registrant's Telephone number, including area code _____________________________________________________________ Former address: 4900 Seminary Road, Suite 800 Alexandria, Virginia 22311 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 November 5, 2004 13,598,836 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 September 30, 2004 (unaudited) and June 30, 2004 Consolidated Statements of Operations 4 for the Three Months Ended September 30, 2004 and 2003 (unaudited) Consolidated Statements of Cash Flows 5 for the Three Months Ended September 30, 2004 and 2003 (unaudited) Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis 8 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure about Market Risk 12 Item 4. Controls and Procedures 12 Part II Other Information: Item 1. Legal Proceedings 12 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 12 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhib13s and Reports on Form 8-K 13 SIGNATURES 14 1 COMTEX NEWS NETWORK, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30 and JUNE 30, 2004
(unaudited) September 30, June 30, 2004 2004 ------------ ------------ ASSETS CURRENT ASSETS Cash $ 455,302 $ 461,419 Accounts Receivable, Net of Allowance of approximately $200,961 and $155,961, at September 30, 2004 and June 30, 2004 respectively 984,354 807,079 Prepaid Expenses and Other Current Assets 32,764 38,397 ------------ ------------ TOTAL CURRENT ASSETS 1,472,420 1,306,895 PROPERTY AND EQUIPMENT, NET 810,304 975,620 RESTRICTED CASH 360,000 360,000 DEPOSITS AND OTHER ASSETS 28,617 28,617 ------------ ------------ TOTAL ASSETS $ 2,671,341 $ 2,671,132 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES: Accounts Payable and Other Accrued Expenses $ 962,041 $ 1,260,669 Accrued Payroll Expense 124,003 142,695 Amount due under Bank Financing Agreement 474,491 201,911 Deferred Revenue 64,330 100,297 Note Payable - Other, Current 90,000 60,000 Capital Lease Obligations, Current 25,596 36,599 ------------ ------------ TOTAL CURRENT LIABILITIES 1,740,461 1,802,171 LONG-TERM LIABILITIES: Capital Lease Obligations, Long-Term 19,548 23,355 Long-Term Note Payable - Affiliate 856,954 856,954 Long-Term Note Payable - Other 270,000 300,000 Deferred Rent 10,738 11,290 ------------ ------------ TOTAL LONG-TERM LIABILITIES 1,157,240 1,191,599 ------------ ------------ TOTAL LIABILITIES 2,897,701 2,993,770 COMMITMENTS AND CONTINGENCIES (Note 3) STOCKHOLDERS' DEFICIENCY Common Stock, $0.01 Par Value - 25,000,000 Shares Authorized; Shares issued and outstanding: 13,598,836 at September 30, 2004 and June 30, 2004 135,988 135,988 Additional Paid-In Capital 12,311,672 12,311,672 Accumulated Deficit (12,674,020) (12,770,298) ----------- ----------- Total Stockholders' Deficiency (226,360) (322,638) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,671,341 $ 2,671,132 =========== ===========
The accompanying "Notes to Consolidated Financial Statements" are an integral part of these consolidated financial statements 2 COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended September 30, ---------------------------- 2004 2003 ------------ ------------ Revenues $ 1,987,349 $ 2,172,921 Cost of Revenues (including depreciation and amortization expense of approximately $99,000 for the three months ended September 30, 2004 and 2003) 979,782 932,257 ------------ ------------ Gross Profit 1,007,567 1,240,664 Operating Expenses Technical Operations and Support 331,740 606,961 Sales and Marketing 141,170 85,279 General and Administrative 322,376 596,280 Stock-based Compensation - 27,864 Depreciation and Amortization 80,549 152,770 ------------ ------------ Total Operating Expenses 875,835 1,469,154 Operating (Loss)/Income 131,732 (228,490) Other Income (Expense) Interest Expense (35,239) (24,138) Interest Income/Other (215) 916 ------------ ------------ Other Income (Expense), net (35,454) (23,222) ------------ ------------ Income (Loss) Before Income Taxes 96,278 (251,712) Income Taxes - 425 ------------ ------------ Net Income (Loss) $ 96,278 $ (252,137) ============ ============ Basic Earnings (Loss) Per Common Share $ 0.01 $ (0.02) ============ ============ Weigted Average Number of Common Shares 13,598,836 13,507,851 ============ ============ Diluted Earnings (Loss) Per Common Share $ 0.01 $ (0.02) ============ ============ Weighted Average Number of Shares Assuming Dilution 14,706,989 13,507,851 ============ ============
The accompanying "Notes to Consolidated Financial Statements" are an integral part of these consolidated financial statements 3 COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30, --------------------------- 2004 2003 --------- --------- Cash Flows from Operating Activities: Net Income (Loss) $ 96,278 $(252,137) Adjustments to reconcile net (loss)/income to net cash (used in) provided by operating activities: Depreciation and Amortization Expense 179,945 252,166 Bad Debt Expense 15,000 (28,680) Stock Based Compensation - 27,864 Changes in Assets and Liabilities: Accounts Receivable (192,275) 12,712 Prepaid Expenses and Other Current Assets 5,633 26,537 Deposits and Other Assets -- 333 Accounts Payable and Accrued Expenses (298,628) 279,446 Accrued Payroll Expense (18,692) (166,306) Deferred Revenue (35,967) (43,750) Deferred Rent (552) 8,084 --------- --------- Net Cash (used in) provided by Operating Activities (249,258) 116,269 Cash Flows from Investing Activities: Purchases of Property and Equipment (14,629) (42,666) --------- --------- Net Cash used in Investing Activities (14,629) (42,666) Cash Flows from Financing Activities: Repayments - Capital Lease Obligations (14,810) (13,411) Net Proceeds from Bank Financing Agreement 272,580 - --------- Proceeds from Exercise of Stock Options - 33,773 --------- --------- Net Cash provided by Financing Activities 257,770 20,362 --------- --------- Net (Decrease) Increase in Cash (6,117) 93,965 Cash at Beginning of Period 461,419 464,981 --------- --------- Cash at End of Period $ 455,302 $ 558,946 ========= =========
The accompanying "Notes to Consolidated Financial Statements" are an integral part of these consolidated financial statements 4 COMTEX NEWS NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 2004 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. (inactive as of December 31 2002), 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, 2004 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, 2004 ("2004 Form 10-K"), filed with the Securities and Exchange Commission on September 28, 2004, as amended and filed with the Securities and Exchange Commission on October 28, 2004. In December 2002, the FASB issued SFAS No. 148 (SFAS 148), Accounting for Stock-Based Compensation-Transition and Disclosure, which amends SFAS No. 123 (SFAS 123), Accounting for Stock-Based Compensation. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS 123 to require disclosures in both the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. In contrast, the Company will continue to account for its employee stock option plans in accordance with APB 25 and related interpretations, which results in no charge to earnings when options are issued at fair market value. As of the quarter ended March 31, 2003, the Company has adopted the disclosure rules of SFAS No. 148 and does not expect that this statement will have a material impact on its financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below:
Three Months Ended September 30, 2004 2003 --------------------------------------- Net Income (Loss), as reported $ 96,278 $ (252,137) Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects 82,919 169,236 --------------------------------------- Pro Forma Net Income (Loss) $ 13,359 $ (421,373) ======================================= Basic and Diluted Income (Loss) Per Share, as reported $ 0.01 $ (0.02) Basic and Diluted Income (Loss) Per Share, pro forma $ 0.00 $ (0.03)
5 The per share weighted-average fair value of stock options granted for the three month periods ended September 30, 2004 and 2003 was $0.17 and $0.26 respectively, on the grant date with the following weighted average assumptions: Three Months Ended September 30, 2004 2003 ------------------- -------------------- Expected dividend yield 0% 0% Risk-free interest rate 4.12% - 4.48% 3.56% - 4.49% Expected life (in years) 10 10 Volatility 1.5 1.5 The Company accounts for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued based on the fair value of the equity instruments issued in accordance with the EITF 96-18, Accounting For Equity Instruments That Are Issued To Other Than Employees For Acquiring, or in Conjunction With Selling Goods or Services. Income (loss) per share is presented in accordance with the provisions of SFAS No. 128, "Earnings Per Share" ("EPS"). Basic EPS excludes dilution for potentially dilutive securities and is computed by dividing income (losses) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock. Diluted net loss per share is equal to basic net loss per share since all potentially dilutive securities are anti-dilutive for each of the periods presented with a net loss. Diluted net income (loss) per common share for the three months ended September 30, 2004 and 2003 do not include the effects of options to purchase approximately 1.2 million and 3.1 million shares of common stock in 2004 and 2003, respectively, and approximately 1.1 million shares of common stock in 2003 related to the note payable to AMASYS, on an "as if" converted basis, since their inclusion would have an antidilutive effect. Certain amounts for the three months ended September 30, 2003, and as of June 30, 2004, have been reclassified to conform to the presentation as of and for the three months ended September 30, 2004. 2. Income Taxes ------------ There is no provision for income taxes for the three months ended September 30, 2004 due to the utilization of federal and state net operating loss carryforwards. The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when the Company cannot make the determination that it is more likely than not that some portion or all of the related tax asset will be realized. 6 3. Commitments and Contingencies ----------------------------- In July 2003, the Company commenced negotiations with its landlord regarding the proposed termination of the lease obligation at 4900 Seminary Road. On December 9, 2003, the Company and Plaza I-A executed a settlement agreement terminating the subject lease and the above lawsuit was dismissed on or about December 17, 2003. The total remaining liability on the lease was approximately $2.6 million prior to the settlement agreement. Pursuant to the terms of the settlement agreement, the Company paid rent and legal fees of approximately $147,000 and entered into a four-year note payable to Plaza I-A for $360,000 which is secured by a $360,000 certificate-of-deposit-backed standby letter of credit (Note 4). On April 15, 2004, the Company's former Chairman/CEO and President, who both resigned on February 5, 2004, filed a demand for arbitration against the Company related to the terms of their employment agreements. The demand alleges a breach of the employment agreements and requests payment of approximately $129,000 to the former employees. The Company denies the allegations and intends to vigorously defend this action. The Company is also 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. 4. Notes Payable ------------- In December 2003, in connection with the lease termination discussed above (see "Commitments and Contingencies"), the Company executed a four-year note payable in the amount of $360,000 to Plaza I-A, effective November 1, 2003, with interest payable monthly at 4% per annum and principal payments of $10,000 per month, beginning January 1, 2005. The note is secured by a letter of credit provided by Silicon Valley Bank (the "Bank"). The letter of credit is secured by the Company's $360,000 certificate of deposit held by the Bank. Also in December 2003, the Company entered into an Accounts Receivable Purchase Agreement with the Bank (the "Financing Agreement"), which provides for a revolving line of credit of up to $1 million collateralized by the Company's accounts receivable. At September 30, 2004, approximately $474,000 was due to the Bank related to advances under the Financing Agreement. On December 9, 2003, the Company executed an amendment to the Amended, Consolidated and Restated 10% Senior Subordinated Secured Note (the "Amended Note"), payable to Amasys Corporation ("Amasys"), an affiliated company, (said amendment the "Third Amendment") for the purpose of reducing the price at which the Amended Note may be converted into common stock of the Company. Pursuant to the Third Amendment, Amasys agreed to subordinate the Amended Note to both the Company's note payable to its former landlord and to the Financing Agreement. In consideration for these subordination agreements, the Company agreed to reduce the conversion price stipulated in the Amended Note from the previously-stated conversion price of $1.20 per share to $0.75 per share, and to increase this conversion price by $0.05 every one hundred and eighty (180) days thereafter. At the date of the transaction the conversion price of 7 the Amended Note was in excess of the stock price. As of September 30, 2004, the Amended Note had a principal balance of $856,954. 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, 2004 filed with the Securities and Exchange Commission on September 28, 2004, as amended and filed with the Securities and Exchange Commission on October 28, 2004. 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, as amended, for the year ended June 30, 2004 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 September 30, 2004, to the three months - ---------------------------------------------------------------------------- ended September 30, 2003 - ------------------------ During the three months ended September 30, 2004, we reported an operating profit of approximately $132,000, compared to an operating loss of approximately 8 $228,000 during the three months ended September 30, 2003. We reported a net profit of approximately $96,000 during the three months ended September 30, 2004, compared to a net loss of approximately $252,000 for the three months ended September 30, 2003. As discussed below, the incremental improvements in operating and net income are due primarily to decreased operating expenses, partially offset by decreases in gross revenues and 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 September 30, 2004, total revenues were approximately $1,987,000 or approximately $186,000 (9%) less than the total revenues for the three months ended September 30, 2003. The decline in revenues is due to a loss of clients as a result of business closures and business consolidations, primarily in the Internet and personal investor markets, as well as reductions in our distributor clients' royalty costs due to a decline in their revenues. Our cost of revenues consists primarily of content license fees and royalties to information providers, depreciation and amortization expense on our production software, and data communication costs for the delivery of our products to customers. The cost of revenues for the three months ended September 30, 2004 was approximately $980,000 or approximately $48,000 (5%) more than the cost of revenues for the three months ended September 30, 2003. The increase in cost is due to an increase in content royalties of approximately $100,000 which was offset by a decrease in content fixed fees of approximately $34,000 and a decrease of approximately $20,000 in data transmission costs. Gross profit for the three months ended September 30, 2004 was approximately $1,008,000 or approximately $233,000 (19%) 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 September 30, 2004 to approximately 51% from approximately 57% for the three months ended September 30, 2003. The decline is due to a decrease in revenues and a net increase in content royalty costs which was offset by a decrease in data transmission costs as discussed above. Total operating expenses for the three months ended September 30, 2004 were approximately $876,000 representing an approximate $593,000 (40%) decrease in operating expenses from the three months ended September 30, 2003. The decrease in expenses resulted from a decrease in technical operations support expenses, a decrease in general and administrative expenses, a decrease in stock-based compensation, and a decrease in depreciation and amortization expenses, offset in part by an increase in sales and marketing expenses. Technical operations and support expenses during the three months ended September 30, 2004 decreased approximately $275,000 (45%) from the three months ended September 30, 2003. The decrease is primarily due to expenses incurred for outsourced technology services during the three months ended September 30, 2003 for technical consultants (to provide management, systems administration, and programming services and to move the production data center to an offsite, hosted facility), and was partially offset by increases in personnel expenses in the current period. Sales and marketing expenses increased by approximately $56,000 (66%) for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. The increase is the result of increases in personnel and related expenses over the same period in the prior year. 9 General and administrative expenses for the three months ended September 30, 2004 were approximately $274,000 (46%) less than these expenses during the three months ended September 30, 2003. The decrease resulted primarily from a decrease in personnel and recruiting costs of approximately $167,000; a decrease in rent and occupancy costs of approximately $102,000; a decrease in professional and consulting fees of approximately $36,000; and a decrease in board of director fees of approximately $10,000 due to a decrease in the number of meetings in the current period. The decrease was partially offset by increases in bad debt expense due to the recovery in the prior period of previously written-off accounts receivable Stock-based compensation was approximately $28,000 during the three months ended September 30, 2003 and was related to the conversion of an incentive stock option to a non-qualified stock option to a member of the Board of Directors and to warrants granted to a consultant. There was no such activity during the same period in the current year. Depreciation and amortization expense for the three months ended September 30, 2004 was approximately $72,000 (47%) lower than the expense during the same period in the prior year. The decrease was due primarily to the disposal of assets related to the office move and the move of our data center to an offsite, hosted facility during the three months ended September 30, 2003. Other expense, net of other income, for the three months ended September 30, 2004 increased approximately $12,000, or 53%, compared to the three months ended September 30, 2003 mainly due to an increase in interest expenses related to the bank financing agreement and the note payable to our former landlord. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES - ---------------------------------------------------- For the three months ended September 30, 2004, we had an operating profit of approximately $132,000 and a net profit of approximately $96,000. At September 30, 2004, we had a working capital deficit of approximately $268,000, compared to a working capital deficit of approximately $495,000 at June 30, 2004. We had a net stockholders' deficiency of approximately $226,000 at September 30, 2004, compared to a net stockholders' deficiency at June 30, 2004 of approximately $323,000. The decrease in stockholders' deficiency is due to net income earned during the three months ended September 30, 2004. For the three months ended September 30, 2004, operating activities resulted in approximately $249,000 cash flow deficit. We had cash of approximately $455,000 at September 30, 2004, compared to approximately $461,000 at June 30, 2004. We made capital expenditures of approximately $15,000 during the three months ended September 30, 2004, primarily for computer and communications equipment. Financing activities resulted in approximately $258,000 in cash from Accounts Receivable Purchase Agreement with Silicon Valley Bank (the "Financing Agreement") described under Notes Payable above, partially offset by payments made on capital leases. 10 The Company's future contractual obligations and commitments as of September 30, 2004 are as follows:
Amounts Due by Period: 2005 2006 2007 2008 2009 --------------- -------------- --------------- -------------- --------------- Operating Leases $100,098 $80,731 $23,865 $ - $ - Capital Leases 27,449 20,219 6,833 - - Note Payable Other 60,000 120,000 120,000 60,000 - Note Payable Affiliate 856,954 --------------- -------------- --------------- -------------- --------------- Total $187,547 $220,950 $150,698 $60,000 $856,954 =============== ============== =============== ============== ===============
Currently we are dependent on our cash reserves to fund operations; despite making a profit for the quarter ended September 30, 2004, we incurred net losses for the years ended June 30, 2004 and 2003 and our revenue base has been declining. Assuming no immediate increase in revenue or an infusion of capital, the Company is at risk of being unable to generate sufficient liquidity to meet its obligations. The Company utilized and continues to utilize its Financing Agreement to meet its liquidity needs. Further corporate consolidation or market deterioration affecting our customers could impair our ability to generate such revenues. No assurance may be given that we will be able to maintain the revenue base or the profitable operations that may be necessary to achieve our liquidity needs. EBITDA, as defined below, was approximately $311,000 for the three months ended September 30, 2004 compared to EBITDA of approximately $51,000 for the three months ended September 30, 2003. The increase in EBITDA during the three months ended September 30, 2004 compared to the three-month period in the prior year is the net result of reduced revenues, increased cost of revenues, and reduced operating expenses. The table below shows the reconciliation from net income (loss) to EBITDA. Three Months Ended September 30, 2004 2003 --------------- --------------- --------------- --------------- Reconciliation to EBITDA: Net Income (Loss) $ 96 $ (252) Stock Based Compensation - 28 Depreciation and Amortization 180 252 Interest/Other Expense 35 23 Income Taxes - - --------------- --------------- EBITDA $ 311 $ 51 EBITDA consists of earnings before interest expense, interest and other income, income taxes, 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 U.S. generally accepted accounting principles, and as a result, our measure of EBITDA might not be comparable to similarly titled measures used by other companies. 11 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 financial statements and notes thereto contained elsewhere in this report for more detailed information. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK --------------------------------------------------------- None. 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-15(e) or 15d-15(e)) 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 In July 2003, the Company commenced negotiations with its former landlord, Plaza I-A Associates ("Plaza I-A") regarding the proposed termination of the lease obligation at 4900 Seminary Road, Alexandria, Virginia. As part of the negotiations, on September 3, 2003, Plaza I-A filed a lawsuit in Alexandria General District Court in the Commonwealth of Virginia for approximately $92,000 in unpaid rent and late fees through September 30, 2003. On December 9, 2003, the Company and Plaza I-A executed a settlement agreement terminating the subject lease and the above lawsuit was dismissed on or about December 17, 2003. The total remaining liability on the lease was approximately $2.6 million prior to the settlement agreement. Pursuant to the terms of the settlement agreement, the Company paid rent and legal fees of approximately $147,000 and entered into a four-year note payable to Plaza I-A for $360,000. Settlement expense with Plaza I-A for the nine months ended March 31, 2004 includes the $360,000 expense for the four-year note, approximately $143,000 in commissions 12 and legal fees, as well as an expense related to the forfeiture of the Company's security deposit in the face amount of approximately $62,000, partially offset by the recovery of deferred rent expense of approximately $87,000. On April 15, 2004, the Company's former Chairman/CEO and President, who both resigned on February 5, 2004, filed a demand for arbitration against the Company related to the terms of their employment agreements. The demand alleges a breach of the employment agreements and requests payment of approximately $129,000 to the former employees. The Company denies the allegations and intends to vigorously defend this action. The Company is also 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. Unregistered Sales of Equity 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 None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 13 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None. 14 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: November 15, 2004 By: /S/ C.W. GILLULY ------------------ C.W. Gilluly, Ed.D. Interim Chairman and Chief Executive Officer (Principal Executive Officer) By: /S/ MATTHEW BALL ------------------ Matthew Ball Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EX-31 2 form10q_ex311-111204.txt EXHIBIT 31.1 Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, C.W. Gilluly, Interim President and Chief Executive Officer, certify that: 1. I have reviewed this report on Form 10-Q for the period ended September 30, 2004 of Comtex News Network, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. November 15, 2004 /s/ C.W. Gilluly ------------------------------------- C.W. Gilluly, Ed.D. Interim President and Chief Executive Officer EX-31 3 form10q_ex312-111204.txt EXHIBIT 31.2 Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Matthew Ball, Chief Financial Officer, certify that: 1. I have reviewed this report on Form 10-Q for the period ended September 30, 2004 of Comtex News Network, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. November 15, 2004 /s/ Matthew Ball -------------------------------------------- Matthew Ball Chief Financial Officer EX-32 4 form10q_ex321-111204.txt EXHIBIT 32.1 Exhibit 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 C.W. Gilluly, Chief Executive Officer of Comtex News Network, Inc. (the "Company") certifies in his capacity as an officer of the Company that he has reviewed the Report of the Company on Form 10-Q for the period ended September 30, 2004 and that to the best of his or her knowledge: 1. the report fully complies with the requirements of Sections 13(a) and 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. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or it staff upon request. November 15, 2004 /s/ C.W. Gilluly ----------------------------------- C.W. Gilluly, Ed.D. Chief Executive Officer EX-32 5 form10q_ex322-111204.txt EXHIBIT 32.2 Exhibit 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Matthew Ball, Chief Financial Officer of Comtex News Network, Inc. (the "Company") certifies in his capacity as an officer of the Company that he has reviewed the Report of the Company on Form 10-Q for period ended September 30, 2004 and that to the best of his or her knowledge: 1. the report fully complies with the requirements of Sections 13(a) and 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. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or it staff upon request. November 15, 2004 /s/ Matthew Ball -------------------------------------- Matthew Ball Principal Finance Officer (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----