-----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, J3JyoFYcatdo3VL4ZFeMmUs3IxOE5iB12iqUKgTRPi9sqOdUxBAcwbYGPgmsr4FV VaaBzQz7CAU75h/nkni0xQ== 0001188112-05-001996.txt : 20051114 0001188112-05-001996.hdr.sgml : 20051111 20051114163141 ACCESSION NUMBER: 0001188112-05-001996 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 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: 051202023 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 t10q-1234.txt 10-Q 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, 2005 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 --- --- Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- As of November 11, 2005 13,700,247 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 Balance Sheets 2 as of September 30, 2005 (unaudited) and June 30, 2005 Statements of Income 3 for the Three Months Ended September 30, 2005 and 2004 (unaudited) Statements of Cash Flows 4 for the Three Months Ended September 30, 2005 and 2004 (unaudited) Notes to Financial Statements 5 Item 2. Management's Discussion and Analysis 9 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure about Market Risk 13 Item 4. Controls and Procedures 13 Part II Other Information: Item 1. Legal Proceedings 14 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits 14 SIGNATURES 16 1
Comtex News Network, Inc. Balance Sheets September 30, June 30, 2005 2005 ---------------- ---------------- ASSETS (Unaudited) CURRENT ASSETS Cash $ 1,403,798 $ 1,225,323 Accounts Receivable, Net of Allowance of $180,758 at September 30, 2005 and June 30, 2005 944,792 751,433 Prepaid Expenses and Other Current Assets 33,921 223,789 ---------------- ---------------- TOTAL CURRENT ASSETS 2,382,511 2,200,544 PROPERTY AND EQUIPMENT, NET 337,888 425,008 DEPOSITS AND OTHER ASSETS 49,657 54,657 ---------------- ---------------- TOTAL ASSETS $ 2,770,056 $ 2,680,209 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Other Accrued Expenses $ 1,124,483 $ 1,072,780 Accrued Payroll Expense 147,536 131,605 Amount due under Bank Financing Agreement - 151,713 Deferred Revenue 17,012 15,829 Capital Lease Obligations, Current 17,793 16,722 ---------------- ---------------- TOTAL CURRENT LIABILITIES 1,306,824 1,388,649 LONG-TERM LIABILITIES: Capital Lease Obligations, Long Term 1,779 6,633 Long-Term Note Payable - Affiliate 856,954 856,954 Deferred Rent 18,707 21,785 ---------------- ---------------- TOTAL LONG-TERM LIABILITIES 877,440 885,372 ---------------- ---------------- TOTAL LIABILITIES 2,184,264 2,274,021 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common Stock, $0.01 Par Value - 25,000,000 Shares Authorized; 13,600,247 Shares issued and outstanding 136,002 136,002 Additional Paid-In Capital 12,428,620 12,311,898 Accumulated Deficit (11,978,830) (12,041,712) ---------------- ---------------- Total Stockholders' Equity 585,792 406,188 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,770,056 $ 2,680,209 ================ ================ The accompanying "Notes to Financial Statements" are an integral part of these financial statements 2
Comtex News Network, Inc. Statements of Income (Unaudited) Three months ended September 30, --------------------------------- 2005 2004 --------------- --------------- Revenues $ 1,996,431 $ 1,987,349 Cost of Revenues (including depreciation and amortization expense of approximately $45,000 and $99,000 respectively 936,427 979,782 --------------- --------------- Gross Profit 1,060,004 1,007,567 Operating Expenses Technical Operations & Support 320,115 331,740 Sales & Marketing 143,562 141,170 General & Administrative 315,001 322,376 Stock-based Compensation 116,722 - Depreciation & Amortization 60,839 80,549 --------------- --------------- Total Operating Expenses 956,239 875,835 Operating Income 103,765 131,732 Other (expense) Interest Expense (24,983) (35,239) (Other Expense) - (215) --------------- --------------- Other Expense (24,983) (35,454) Income Before Income Taxes 78,782 96,278 Income Taxes 15,900 - --------------- --------------- Net Income $ 62,882 $ 96,278 =============== =============== Basic Earnings Per Common Share $ 0.01 $ 0.01 =============== =============== Weighted Average Number of Common Share 13,600,247 13,598,836 =============== =============== Diluted Earnings Per Common Share $ 0.01 $ 0.01 =============== =============== Weighted Average Number of Shares Assuming Dilution 14,784,325 14,706,989 =============== =============== a) Stock-based compensation costs are allocated in operating expense categories as follows: Technical Operations & Support - $8,138; Sales & Marketing - $5,663; General & Administrative - $102,921. The accompanying "Notes to Financial Statements" are an integral part of these financial statements 3
Comtex News Network, Inc. Statements of Cash Flows (Unaudited) Three Months Ended September 30, --------------------------- 2005 2004 ------------ ------------ Cash Flows from Operating Activities: Net Income $ 62,882 $ 96,278 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and Amortization 105,639 179,945 Bad Debt Expense - 15,000 Stock Based Compensation 116,722 - Changes in Assets and Liabilities: Accounts Receivable (193,359) (192,275) Prepaid Expenses and Other Current Assets 189,867 5,633 Deposits and Other Assets 5,000 - Accounts Payable and Accrued Expenses 51,703 (298,628) Accrued Payroll Expense 15,931 (18,692) Deferred Revenue 1,183 (35,967) Deferred Rent (3,078) (552) ------------ ------------ Net Cash provided by/(used in) Operating Activities 352,490 (249,258) Cash Flows used in Investing Activity Purchases of Property and Equipment (18,519) (14,629) ------------ ------------ Cash Flows from Financing Activities: Repayments - Capital Lease Obligations (3,783) (14,810) Net (Repayments on)/Proceeds from Bank Financing Agreement (151,713) 272,580 ------------ ------------ Net Cash (used in)/provided by Financing Activities (155,496) 257,770 Net Increase/(Decrease) in Cash 178,475 (6,117) Cash at Beginning of Year 1,225,323 461,419 ------------ ------------ Cash at End of Period $ 1,403,798 $ 455,302 ============ ============ The accompanying "Notes to Financial Statements" are an integral part of these financial statements 4
COMTEX NEWS NETWORK, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) September 30, 2005 1. BASIS OF PRESENTATION The accompanying interim financial statements of Comtex News Network, Inc. (the "Company" or "Comtex") 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. In November of 2004, the company sold its inactive wholly owned subsidiary nFactory Comtex, S.L. for an immaterial amount. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at June 30, 2005 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, 2005 ("2005 Form 10-K"), filed with the Securities and Exchange Commission on September 28, 2005. On December 16, 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT. SFAS No. 123R which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. Comtex adopted this standard on its effective date, July 1, 2005. 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 and net income per share would have been adjusted to the pro forma amounts indicated below: Three months ended September 30, 2004 ---------------------- Net Income, as reported $ 96,278 Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects 82,919 ---------------------- Pro Forma Net Income 13,359 ====================== Basic and Diluted Income Per Share, as reported $ 0.01 ====================== Basic and Diluted Income Per Share, pro forma $ 0.00 ====================== The per share weighted-average fair value of stock options granted for the three month period ended September 30, 2004 was $0.17 on the grant date with the following weighted average assumptions: 5 Three months ended September 30,2005 -------------------------- Expected dividend yield 0 Risk-free interest rate 4.12% - 4.48% Expected life (in years) 10 Volatility 1.5 The company has one stock-based employee compensation plan, which is described more fully below. Prior to July 1, 2005, the company accounted for this plan under the recognition and measurement provisions of APB Opinion 25, Accounting for stock issued to employees, and related interpretations, as permitted by FASB Statement No.123, Accounting for Stock-Based Compensation. Effective July 1, 2005, the company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective transition method. Under this method, compensation cost recognized for the three months ended September 30, 2005 includes: (a) compensation costs for all share based payments granted prior to, but not yet vested as of July 1, 2005, based on grant-date fair value estimated in accordance with the original provisions of statement 123, and (b) compensation cost for all share-based payments granted subsequent to July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of 123(R). Results for prior periods have not been restated. As a result of adopting Statement 123(R) on July 1, 2005, the company's income before income taxes and net income for the three month period ended September 30, 2005 are approximately $117,000 lower than if it had continued to account for share-based compensation under Opinion 25. There would have been no effect on basic and diluted earnings per share, cash flow from operations, and cash flow from financing activities for the three month period ended September 30, 2005, if the company had not adopted statement 123(R). Stock Option Plan Stock Options. Stock options are typically granted to employees with an exercise prices equal to the market price of the Company's stock at the date of grant. Stock options are issued in accordance with a vesting schedule and, generally vest over one to three years and have a term of 10 years. Compensation expense for stock options is recognized over the requisite service period for each separately vesting portion of the stock option award.
Weighted Average Weighted Remaining Aggregate Number of Average Contractual Intrinsic Options Exercise Price Term Value ------------ -------------- ----------------- ------------------ Outstanding at June 30, 2005 1,332,929 $0.25 Granted 1,668,000 $0.34 Forfeited -330 $0.27 Outstanding at September 30, 2005 3,000,599 $0.30 6.5 214,356 ============ ============== ================= ================== Vested or Expected to Vest at September 30, 2005 2,917,200 $0.30 6.5 214,356 ============ ============== ================= ================== Exercisable or Convertible at September 30, 2005 1,540,735 $0.30 6.5 137,524 ============ ============== ================= ==================
6 As of September 30, 2005, 1,540,735 stock option grants had vested. Of this total, 985,035 were granted prior to July 1, 2005, and 555,700 were granted subsequent to July 1, 2005. No options were exercised in the current period. The fair value of stock options issued in the three-month period ending September 30, 2005 was estimated to be $0.47, using a Black-Scholes-option pricing model. The model considers assumptions related to exercise price, expected volatility, risk-free interest rate, and the weighted average expected term of the stock option grants. Expected volatility assumptions utilized in the model were based on historical volatility of the company's stock price over the expected term. The risk-free rate is derived from the U.S. Treasury yield. The company used a weighted average expected term. The fair values of options granted in the first quarter of fiscal 2006 were estimated at the date of grant with the following assumptions: Risk-free interest rate 4.2% Expected Volatility Factor 169% Expected life (in years) 6.2 Exercise Price $ 0.34 Expected Dividend 0 -------------------- Fair Value of each option $ 0.47 ==================== As of September 30, 2005, the company had one share-based plan, which is described above. The compensation cost charged against income for this plan is approximately $117,000. This number includes (a) approximately $14,000 of cost from compensation costs for all share based payments granted prior to, but not yet vested as of July 1, 2005, based on grant-date fair value estimated in accordance with the original provisions of statement 123, and (b) $103,000 compensation cost for all share-based payments granted subsequent to July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of 123(R), net of 5% discount for post vesting forfeitures based on an overall low turnover. No income tax benefits are recognized in the income statement for share-based arrangements due to the utilization of federal and state net operating loss carryforwards. As of September 30, 2005, the total compensation cost related to non-vested awards not yet recognized is $703,000. The weighted-average period over which this cost is expected to be recognized is 15 months. Total compensation cost classified as marketing expense pertains to options granted to employees in the marketing department. In contrast, no performance was required and no consideration was received for the instrument. Income 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 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 income per common share for the three months ended September 30, 2005 and 2004 do not include the effects of options to 7 purchase approximately 1.8 million and 1.2 million as the inclusion of these options would have been anti-dilutive due to the options' exercise prices being greater than the average market price of the Company's common shares during the respective periods. 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 provision for income at September 30, 2005 is due to the alternative minimum tax. 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. 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 was secured by a $360,000 certificate-of-deposit-backed standby letter of credit (See Note 4). In January 2005, the note was repaid and the certificate-of-deposit-backed standby letter of credit was released. 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 alleged a breach of the employment agreements and requested payment of approximately $129,000 to the former employees. The company denies the allegations and intends to vigorously defend this action. Based upon events to date in the arbitration, the company has accrued approximately $80,000 in expenses as of September 30, 2005. 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 8 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, 2004. The note was secured by a letter of credit provided by Silicon Valley Bank (the "Bank"). The letter of credit was secured by the Company's $360,000 certificate of deposit held by the Bank. In January 2005, the note was repaid and the certificate-of-deposit-backed standby letter of credit was released. 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. As of December 27, 2004, the Company entered into the Second Amendment to the Accounts Receivable Purchase Agreement, dated as of December 18, 2003, by and between the Bank and the Company. Under this Amended Agreement, the applicable rates were lowered, certain covenants were amended and the term was extended through the end of calendar year 2005. As of September 30, 2005, the balance due to the Bank related to advances under the Financing Agreement was fully repaid. The company is required to maintain a $300,000 minimum balance of cash in the bank at all times. 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 the Amended Note was in excess of the stock price. As of September 30, 2005, the Amended Note had a principal balance of $856,954 and the conversion rate was $0.90. The outstanding principal balance of the Amended Note is due in July 2008. 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 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, 2005 filed with the Securities and Exchange Commission on September 28, 2005. 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 9 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, 2005 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. The company has one stock-based employee compensation plan, which is described above . Prior to July 1, 2005, the company accounted for this plan under the recognition and measurement provisions of APB Opinion 25, Accounting for stock issued to employees, and related interpretations, as permitted by FASB Statement No.123, Accounting for Stock-Based Compensation. Effective July 1, 2005, the company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective transition method. Under this method, compensation cost recognized for the three months ended September 30, 2005 includes: (a) compensation costs for all share based payments granted prior to, but not yet vested as of July 1, 2005, based on grant-date fair value estimated in accordance with the original provisions of statement 123, and (b) compensation cost for all share-based payments granted subsequent to July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of 123(R). Results for prior periods have not been restated. As a result of adopting Statement 123(R) on July 1, 2005, the company's income before income taxes and net income for the three month period ended September 30, 2005 are approximately $117,000 lower than if it had continued to account for share-based compensation under Opinion 25. There would have been no effect on basic and diluted earnings per share, cash flow from operations, and cash flow from financing activities for the three month period ended September 30, 2005, if the company had not adopted statement 123(R). As of September 30, 2005, the total compensation cost related to non-vested awards not yet recognized is $703,000. The weighted-average period over which this cost is expected to be recognized is 15 months. RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2005, TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004 During the three months ended September 30, 2005, we reported an operating profit of approximately $104,000, compared to $132,000 during the three months ended September 30, 2004. We reported a net profit of approximately $63,000 during the three months ended September 30, 2005, compared to $96,000 for the three months ended September 30, 2004. As discussed below, the decline in operating and net income is due primarily to increased operating expenses, primarily stock based compensation due to the adoption of SFAS 123 (R) as discussed above, partially offset by growth 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 September 30, 2005, total revenues were approximately $1,996,000 or approximately $9,000 more than the total revenues for the three months ended September 30, 2004. The increase is due to growth in database customer revenues partially offset by a loss of clients as a result of business contractions, primarily in the Internet and personal investor markets. 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, 2005 was approximately $936,000 or $43,000 (4%) less than the cost of revenues for the three months ended September 30, 2004. The decrease in cost is due to a reduction in content fixed fees of approximately $23,000, a decrease of approximately $56,000 in depreciation and amortization expense, and a decrease of approximately $3,000 in data transmission costs which was offset by an increase in content royalties of approximately $39,000. Gross profit for the three months ended September 30, 2005 was approximately $1,060,000 or approximately $52,000 (5%) more than the gross profit for the same period in the prior year. The gross profit as a percentage of revenue increased for the three months ended September 30, 10 2005 to approximately 53% from approximately 51% for the three months ended September 30, 2004. The increase is due to an slight growth in revenues and a net decrease in content fixed fees, depreciation and amortization and data transmission costs which was offset by an increase in content royalty costs as discussed above. Total operating expenses for the three months ended September 30, 2005 were approximately $956,000 representing an approximate $80,000 (9%) increase in operating expenses from the three months ended September 30, 2004. The increase in expenses resulted from an increase in sales and marketing expenses and an increase in stock-based compensation due to the adoption of SFAS 123 (R) as discussed above partially offset by a decrease in technical operations support expenses, a decrease in general and administrative expenses, and a decrease in depreciation and amortization expenses. Technical operations and support expenses during the three months ended September 30, 2005 decreased approximately $12,000 (4%) from the three months ended September 30, 2004. The decrease is primarily due to expenses incurred for outsourced technology services for technical consultants (to provide management, systems administration, and programming services and to move the production data center to an offsite, hosted facility), and a decrease in personnel expenses in the current period. Sales and marketing expenses increased by approximately $2,000 (2%) for the three months ended September 30, 2005 compared to the three months ended September 30, 2004. The increase is the result of increases in personnel and related expenses over the same period in the prior year. General and administrative expenses for the three months ended September 30, 2005 were approximately $315,000 (2%) less than these expenses during the three months ended September 30, 2004. The decrease resulted primarily from a decrease in general and administrative personnel and related expenses, partially offset by an increase in rent expense as a result of an increase in leased office space. Stock-based compensation was approximately $117,000 during the three months ended September 30, 2005 and was related to the adoption of the SFAS 123 (R), as discussed above. Depreciation and amortization expense for the three months ended September 30, 2005 was approximately $20,000 (24%) 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 in the prior year. Other expenses, net of other income, for the three months ended September 30, 2005 decreased approximately $10,000, or 30%, compared to the three months ended September 30, 2004 mainly due to a decrease in interest expenses related to the bank financing agreement, settlement of the note payable to our former landlord, and reduction in interest on capital leases. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For the three months ended September 30, 2005, we had an operating profit of approximately $104,000 and a net profit of approximately $63,000. At September 30, 2005, we had working capital of approximately $1,076,000, compared to a working capital of approximately $812,000 11 at June 30, 2005. We had net stockholders' equity of approximately $586,000 and $406,000 at September 30, 2005 and June 30, 2005 respectively. The increase in stockholders' equity is due to net income and stock-based compensation for the three months ended September 30, 2005. We had cash of approximately $1,404,000 at September 30, 2005, compared to $1,225,000 at June 30, 2005. For the three months ended September 30, 2005, operating activities generated approximately $352,000 in cash. Under the Accounts Receivable Purchase Agreement with Silicon Valley Bank, the company is required to maintain a $300,000 minimum balance of cash in the bank at all times. We made capital expenditures of approximately $19,000 during the three months ended September 30, 2005, primarily for computer and communications equipment for new staff and product development. Financing activities resulted in payments of approximately $155,000 made on capital leases and repayment of the Line of Credit for Accounts Receivable Purchase Agreement with Silicon Valley Bank (the "Financing Agreement"). The Company's future contractual obligations and commitments as of September 30, 2005 are as follows:
AMOUNTS DUE BY PERIOD -------------------------------------------------------- 2006 2007 2008 -------------------------------------------------------- Operating Leases $ 151,683 $ 97,872 $ - Capital Leases 15,164 6,834 - Note Payable, Affiliate - - 856,954 -------------------------------------------------------- Total $ 166,847 $ 104,706 $ 856,954 ========================================================
Currently we are dependent on our cash reserves and accounts receivable financing through the bank to fund operations. We recorded a net profit for the quarter ended September 30, 2005 but 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 $327,000 for the three months ended September 30, 2005 compared to EBITDA of approximately $311,000 for the three months ended September 30, 2004. The increase in EBITDA during the three months ended September 30, 2005 compared to the three-month period in the prior year is the net result of increased revenues and operating expenses, and reduced cost of revenues. The table below shows the reconciliation from net income to EBITDA. 12 Three Months Ended September 30, 2005 2004 -------------------------------- Reconciliation to EBITDA: Net Income $ 63 $ 96 Stock Based Compensation 117 - Depreciation and Amortization 106 180 Interest/Other Expenses 25 35 Income Taxes 16 - -------------------------------- EBITDA $ 327 $ 311 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. 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 Controller 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 13 and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes that have materially affected, or are reasonably likely to materially affect 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 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 alleged a breach of the employment agreements and requested payment of approximately $129,000 to the former employees. The Company denies the allegations and intends to vigorously defend this action. Based upon events to date in the arbitration, the Company has accrued $80,000 in expenses. 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 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. 14 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 15 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) November 14, 2005 By: /S/ C.W. GILLULY ---------------------------- C.W. Gilluly, Ed.D. Chairman and Interim Chief Executive Officer (Principal Executive Officer) By: /S/ HILDA KWENA ---------------------------- Hilda Kwena Treasurer & Controller (Principal Financial and Accounting Officer) 16 EX-31.1 2 tex31_1-1234.txt EX-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, Chairman and Interim Chief Executive Officer, certify that: 1. I have reviewed this report on Form 10-Q for the period ended September 30, 2005 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, 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 14, 2005 /s/ C.W. Gilluly --------------------------------------- C.W. Gilluly, Ed.D. Chairman and Interim Chief Executive Officer EX-31.2 3 tex31_2-1234.txt EX-31.2 EXHIBIT 31.2 CERTIFICATION OF TREASURER & CONTROLLER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Hilda Kwena, Treasurer & Controller, certify that: 1. I have reviewed this report on Form 10-Q for the period ended September 30, 2005 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, 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 14, 2005 /s/ Hilda Kwena ------------------------------------- Hilda Kwena Treasurer & Controller EX-32.1 4 tex32_1-1234.txt EX-32.1 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 C.W. Gilluly, Chairman and Interim 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, 2005 and that to the best of his 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 14, 2005 /s/ C.W. Gilluly ------------------------------------------ C.W. Gilluly, Ed.D. Chairman and Interim Chief Executive Officer EX-32.2 5 tex32_2-1234.txt EX-32.2 EXHIBIT 32.2 CERTIFICATION OF TREASURER & CONTROLLER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Hilda Kwena, Treasurer & Controller of Comtex News Network, Inc. (the "Company") certifies in her capacity as an officer of the Company that she has reviewed the Report of the Company on Form 10-Q for period ended September 30, 2005 and that to the best of 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 14, 2005 /s/ Hilda Kwena ------------------------------------------ Hilda Kwena Principal Financial and Accounting Officer (Treasurer & Controller) -----END PRIVACY-ENHANCED MESSAGE-----