UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 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 May 11, 2004, 13,588,041 shares of the Common Stock of the registrant, par
value $0.01 per share, were outstanding.
COMTEX NEWS NETWORK, INC.
TABLE OF CONTENTS
Part I Financial Information: Page No.
Item 1. Financial Statements
Consolidated Balance Sheets 3
as of March 31, 2004 (unaudited)
and June 30, 2003
Consolidated Statements of Operations 4
for the Three and Nine Months Ended
March 31, 2004 and 2003 (unaudited)
Consolidated Statements of Cash Flows 5
for the Nine Months Ended
March 31, 2004 and 2003 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 9
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
Item 4. Controls and Procedures 16
Part II Other Information:
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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COMTEX NEWS NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, June 30,
2004 2003
----------------- -----------------
ASSETS
CURRENT ASSETS
Cash $ 344,893 $ 464,981
Accounts Receivable, net of allowance of approximately
$125,400 and $140,500, at March 31, 2004 and June 30, 2003,
respectively 692,821 779,136
Prepaid Expenses and Other Current Assets 69,707 86,787
----------------- -----------------
TOTAL CURRENT ASSETS 1,107,421 1,330,904
PROPERTY AND EQUIPMENT, NET 1,153,721 2,067,149
RESTRICTED CASH 360,000 -
DEPOSITS AND OTHER ASSETS 28,617 74,988
----------------- -----------------
TOTAL ASSETS $ 2,649,759 $ 3,473,041
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Expenses $ 1,348,573 $ 1,081,671
Accrued Payroll Expense 216,642 463,699
Amount due under Bank Financing Agreement 164,373 -
Deferred Revenue 80,639 127,634
Note Payable - Other, Current 30,000 -
Capital Lease Obligations, Current 49,013 56,625
----------------- -----------------
TOTAL CURRENT LIABILITIES 1,889,240 1,729,629
LONG-TERM LIABILITIES:
Capital Lease Obligations, Long-Term 28,671 23,483
Long-Term Note Payable - Affiliate 856,954 856,954
Long-Term Note Payable - Other 330,000 -
Deferred Rent 11,842 77,353
----------------- -----------------
TOTAL LONG-TERM LIABILITIES 1,227,467 957,790
----------------- -----------------
TOTAL LIABILITIES 3,116,707 2,687,419
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock, $0.01 Par Value - 25,000,000 shares
authorized; shares issued and outstanding: 13,588,041
and 13,245,170 at March 31, 2004 and June 30, 2003,
respectively 135,880 132,452
Additional Paid-In Capital 12,310,219 12,211,181
Accumulated Deficit (12,913,047) (11,558,011)
----------------- -----------------
Total Stockholders' Equity (Deficiency) (466,948) 785,622
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 2,649,759 $ 3,473,041
================= =================
The accompanying "Notes to Consolidated Financial Statements" are an integral
part of these consolidated financial statements
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COMTEX NEWS NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
March 31, March 31,
---------------------------- ------------------------------
2004 2003 2004 2003
---------------------------- ------------------------------
Revenues $ 1,962,035 $ 2,287,394 $ 6,148,975 $ 7,149,016
Cost of Revenues
(including depreciation and amortization expense of
approximately $99,000, $116,000, $298,000 and $345,000,
respectively) 847,462 977,436 2,694,243 2,949,337
Gross Profit 1,114,573 1,309,958 3,454,732 4,199,679
Operating Expenses
Technical Operations & Support 499,904 475,567 1,657,778 1,495,508
Sales and Marketing 173,830 216,757 418,402 756,116
General and Administrative 338,553 536,840 1,413,711 1,501,258
Settlement with Former Landlord 15,000 - 478,447 -
Loss on Disposal of Assets Related to Lease Termination - - 300,410 -
Stock-based Compensation 16,000 - 67,864 2,100
Depreciation and Amortization 97,155 188,147 380,897 566,711
Total Operating Expenses 1,140,442 1,417,311 4,717,509 4,321,693
Operating Loss (25,869) (107,353) (1,262,777) (122,014)
Other Expense
Interest Expense (34,288) (25,441) (84,792) (77,139)
Other Expense (7,504) (1,903) (7,042) (20,261)
Other Expense (41,792) (27,344) (91,834) (97,400)
Loss Before Provision for Income Taxes (67,661) (134,697) (1,354,611) (219,414)
Provision for Income Taxes - - 425 491
Net Loss $ (67,661) $ (134,697) $ (1,355,036) $ (219,905)
================ ================= ================= =================
Basic and Diluted Loss Per Common Share $ ( 0.00) $ ( 0.01) $ ( 0.10) $ ( 0.02)
================ ================= ================= =================
Weighted Average Number of Common Shares 13,588,041 13,226,965 13,559,617 13,169,902
================ ================= ================= =================
The accompanying "Notes to Consolidated Financial Statements" are an integral
part of these consolidated financial statements
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COMTEX NEWS NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
-------------------------------------
2004 2003
---------------- ----------------
Cash Flows from Operating Activities:
Net Loss $ (1,355,036) $ (219,905)
Adjustments to reconcile net loss to net cash provided by/
(used in) operating activities:
Depreciation and Amortization Expense 679,085 911,292
Bad Debt Expense/(Recovery) (25,066) 56,000
Stock Based Compensation 67,864 2,100
Loss on Disposal of Assets 307,914 14,993
Settlement with Former Landlord 360,000 -
Deferred Rent (65,511) 66,595
Foreign Currency Translation - 7,350
Changes in Assets and Liabilities:
Accounts Receivable 111,381 58,748
Prepaid Expenses and Other Current Assets 17,080 49,218
Deposits and Other Assets 46,371 5,759
Accounts Payable and Other Accrued Expenses 266,902 (771,009)
Accrued Payroll Expense (247,057) (187,338)
Deferred Revenue (46,995) 2,550
---------------- ----------------
Net Cash provided by/(used in) Operating Activities 116,932 (3,647)
Cash Flows from Investing Activities:
Proceeds from Sale of Assets 53,580 -
Increase in Restricted Cash (360,000) -
Purchases of Property and Equipment (82,599) (223,030)
---------------- ----------------
Net Cash used in Investing Activities (389,019) (223,030)
Cash Flows from Financing Activities:
Repayments of Capital Lease Obligations (46,976) (30,733)
Repayments on Note Payable - Affiliate - (49,000)
Net Proceeds from Bank Financing Agreement 164,373 -
Issuance of Stock under Employee Stock Purchase Plan 829 13,901
Proceeds from Exercise of Stock Options 33,773 -
---------------- ----------------
Net Cash provided by/(used in) Financing Activities 151,999 (65,832)
---------------- ----------------
Effect of Exchange Rate Changes on Cash - -
---------------- ----------------
Net Decrease in Cash (120,088) (292,509)
Cash at Beginning of Period 464,981 860,548
---------------- ----------------
Cash at End of Period $ 344,893 $ 568,039
The accompanying "Notes to Consolidated Financial Statements" are an integral
part of these consolidated financial statements
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COMTEX NEWS NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 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. However,
in the opinion of management, they 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, 2003 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, 2003 ("2003 Form 10-K"), as filed with the Securities
and Exchange Commission on September 25, 2003.
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 loss and net
loss per share would have increased to the pro forma amounts below:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
--------------- -------------- ---------------- --------------
Net Loss, as reported $ (67,661) $ (134,697) $ (1,355,036) $ (219,905)
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method
for all awards, net of related tax effects
86,152 136,543 292,072 450,271
--------------- -------------- ---------------- --------------
Pro Forma Net Loss $ (153,813) $ (271,240) $ (1,647,108) $ ( 670,176)
=============== ============== ================ ==============
Basic and Diluted Loss Per Share, as reported $ (0.00) $ (0.01) $ (0.10) $ (0.02)
Basic and Diluted Loss Per Share, pro forma $ (0.01) $ (0.02) $ (0.12) $ (0.05)
6
The per share weighted-average fair value of stock options granted for the
three and nine-month periods ended March 31, 2004 and 2003 was $0.19 and $0.25,
and $0.16 and $0.15 respectively, on the grant date with the following weighted
average assumptions:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------------------ ---------------- ---------------- -----------------
Expected dividend yield 0% 0% 0% 0%
Risk-free interest rate 3.80% - 4.36% 3.25% - 4.82% 3.56% - 4.50% 3.25% - 4.82%
Expected life (in years) 10 5 10 5
Volatility 1.50 1.10 - 1.23 1.50 1.10 - 1.23
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.
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 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.
Certain amounts for the three and nine months ended March 31, 2003, and as
of June 30, 2003, have been reclassified to conform to the presentation as of
and for the three and nine months ended March 31, 2004.
2. Income Taxes
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 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
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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 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 not be material 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 March 31, 2004, approximately $164,000 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
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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 March 31, 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, 2003, as filed with the
Securities and Exchange Commission on September 25, 2003. Historical results and
percentage relationships among any amounts in the Consolidated Financial
Statements are not intended to be indicative of trends in operating results for
any future period.
Forward-looking Statements
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are subject to a
variety of risks and uncertainties, many of which are beyond our control, which
could cause actual results to differ materially from those contemplated in these
forward-looking statements. In particular, the risks and uncertainties include
those described in our annual report on Form 10-K for the year ended June 30,
2003 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 maintenance of effective
operating expense controls.
Existing and prospective investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. We undertake no obligation to update or revise the information contained
in this Form 10-Q, whether as a result of new information, future events or
circumstances or otherwise.
RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2004, to the three months ended
March 31, 2003
During the three months ended March 31, 2004, we incurred an operating loss
of approximately $26,000, compared to an operating loss of approximately
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$107,000 during the three months ended March 31, 2003. We reported a net loss of
approximately $68,000 during the three months ended March 31, 2004, compared to
a net loss of approximately $135,000 for the three months ended March 31, 2003.
As discussed below, the decreases in operating and net losses are due primarily
to decreases in total operating expenses, partially offset by decreases in
revenues and gross profit.
Revenues consist primarily of royalty revenues and fees from the licensing
of content products to information distributors. During the three months ended
March 31, 2004, total revenues were approximately $1,962,000, or approximately
$325,000 (14%) less than the total revenues for the three months ended March 31,
2003. The decline in revenues is due to a loss of clients as a result of
business closures, primarily in the Internet and personal investor markets, and
business consolidations, as well as reductions in our distributor clients'
royalties 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 March 31,
2004 was approximately $847,000, or approximately $130,000 (13%) less than the
cost of revenues for the three months ended March 31, 2003. The decrease in cost
is due to a decrease in content royalties of approximately $96,000, based on our
decreased revenues for the period and negotiated reductions in license fees to
information providers; a decrease of approximately $37,000 in data communication
costs to receive and distribute content; and a decrease of approximately $17,000
in depreciation and amortization expense based on the write-off of a product
offering during fiscal year 2003; partially offset by an increase of
approximately $20,000 in expenses related to an offsite, hosted data facility.
The decrease in content royalties is limited by minimum fees required to be paid
to certain information providers and therefore does not directly track the
decrease in gross revenues.
Gross profit for the three months ended March 31, 2004 was approximately
$1,115,000, or approximately $195,000 (15%) less than the gross profit for the
same period in the prior year due to the decline in revenues and a corresponding
decline in content royalties. Gross profit as a percentage of revenue was
approximately 57% for both the three months ended March 31, 2004 and March 31,
2003.
Total operating expenses for the three months ended March 31, 2004 were
approximately $1,140,000, representing an approximate $277,000 (20%) decrease in
operating expenses from the three months ended March 31, 2003. This decrease in
expenses resulted from decreases in sales and marketing expenses, general and
administrative expenses, and depreciation and amortization expenses. These
decreases were partially offset by increases in technical operations and
support, settlement expenses related to a lease termination with a former
landlord, and stock-based compensation expenses.
Technical operations and support expenses during the three months ended
March 31, 2004 increased approximately $24,000 (5%) from the level of these
expenses in the three months ended March 31, 2003. The increase is primarily
related to fees for consultants providing technical management, systems
administration, and programming services during the period, which were partially
offset by decreases in compensation related to reductions in technical
operations and support personnel.
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Sales and marketing expenses decreased by approximately $43,000 (20%) for
the three months ended March 31, 2004, compared to the three months ended March
31, 2003. The decrease is the result of decreases in sales and marketing
personnel and related expenses compared to the same quarter in the previous
year.
General and administrative expenses for the three months ended March 31,
2004 decreased approximately $198,000 (37%) compared to these expenses during
the three months ended March 31, 2003. The decrease in expenses related to
decreases in general and administrative personnel and related expenses, as well
as a decrease in rent expense as a result of a reduction in leased office space.
During the quarter ended December 31, 2003, the Company reduced its leased
office space from one location of approximately 17,000 square feet to two
locations totaling approximately 5,000 square feet, thereby reducing its monthly
expense for leased office space to approximately $11,000 from approximately
$40,000.
The settlement with former landlord, Plaza I-A, related to the termination
of an approximate $2.6 million remaining liability on our office lease
(including back rent and future lease obligations) completed in December 2003.
The additional $15,000 recorded during the three months ended March 31, 2004
related to an additional commission fee negotiated during the quarter.
Stock-based compensation of $16,000 for the three months ended March 31,
2004, related to the vesting of warrants granted to a consultant in September
2003. There were no such expenses in the three months ended March 31, 2003.
Depreciation and amortization expense for the three months ended March 31,
2004 was approximately $91,000 (48%) lower than the expense during the same
period in the prior year. The decrease was due to the disposal of two asset
groups that were determined to be impaired in the fourth quarter of the fiscal
year ended June 30, 2003, as well as the disposal of assets related to the
office move and the move of our data center to an offsite, hosted facility.
Other expense, net of other income, for the three months ended March 31,
2004 increased approximately $14,000, or 53%, compared to the three months ended
March 31, 2003. The increase was primarily due to interest expense on a bank
financing agreement and the note payable to our former landlord, as well as
losses on the disposal of assets.
Comparison of the nine months ended March 31, 2004 to the nine months ended
March 31, 2003
During the nine months ended March 31, 2004, we incurred an operating loss
of approximately $1,263,000, compared to an operating loss of approximately
$122,000 during the nine months ended March 31, 2003. We reported a net loss of
approximately $1,355,000 during the nine months ended March 31, 2004, compared
to a net loss of approximately $220,000 for the nine months ended March 31,
2003. As discussed below, the increases in both operating and net losses are due
primarily to the settlement of the liability on an operating lease, loss on
disposal of assets related to office and data center moves, an increase in legal
fees, and a decrease in revenues and gross profit margins, all partially offset
by decreased operating expenses.
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Revenues consist primarily of royalty revenues and fees from the licensing
of content products to information distributors. During the nine months ended
March 31, 2004, total revenues were approximately $6,149,000, or approximately
$1,000,000 (14%) less than the total revenues for the nine months ended March
31, 2003. The decline in revenues is due to a loss of clients as a result of
business closures, primarily in the Internet and personal investor markets, and
business consolidations, as well as reductions in our distributor clients'
royalties 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 nine months ended March 31,
2004 was approximately $2,694,000, or approximately $255,000 (9%) less than the
cost of revenues for the nine months ended March 31, 2003. The decrease in cost
is due to a decrease in content royalties of approximately $171,000, based on
our decreased revenues for the period and negotiated reductions in license fees
to information providers; a decrease of approximately $71,000 in data
communication costs to receive and distribute content; and a decrease of
approximately $46,000 in depreciation and amortization expense based on the
write-off of a product offering during fiscal year 2003; partially offset by an
increase of approximately $33,000 in expenses related to an offsite, hosted data
facility. The decrease in content royalties is limited by minimum fees required
to be paid to certain information providers and therefore does not directly
track the decrease in gross revenues.
Gross profit for the nine months ended March 31, 2004 was approximately
$3,455,000, or approximately $745,000 (18%) less than the gross profit for the
same period in the prior year. Gross profit as a percentage of revenue declined
for the nine months ended March 31, 2004, to approximately 56% from
approximately 59% for the nine months ended March 31, 2003. The decline is based
on the decrease in gross revenues, accompanied by a lesser corresponding
decrease in content royalties, as discussed above.
Total operating expenses for the nine months ended March 31, 2004 were
approximately $4,718,000, representing an approximate $396,000 (9%) increase in
operating expenses from the nine months ended March 31, 2003. This increase in
expenses resulted from increases in technical operations and support expenses,
settlement of expenses related to a lease termination with a former landlord,
the loss on disposal of assets related to the lease termination, and stock-based
compensation. These increases were partially offset by decreases in sales and
marketing expenses, general and administrative, and depreciation and
amortization. Excluding the former landlord settlement, loss on disposal of
assets and legal expense recovery, discussed below, the total operating expenses
for the nine months ended March 31, 2004 decreased approximately $777,000, or
16%, from the total operating expenses for the nine months ended March 31, 2003.
Technical operations and support expenses during the nine months ended
March 31, 2004 increased approximately $162,000 (11%) from the level of these
expenses in the nine months ended March 31, 2003. The increase during the period
is primarily related to fees for consultants for providing technical management,
systems administration, and programming services to streamline and migrate our
production data center to an offsite, hosted facility. The increase in expenses
was partially offset by decreases in technical operations and support personnel.
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Sales and marketing expenses decreased by approximately $338,000 (45%) for
the nine months ended March 31, 2004, compared to the nine months ended March
31, 2003. The decrease is the result of decreases in sales and marketing
personnel and related expenses, compared to the same period in the previous
year, as well as the shutdown of sales operations in Spain as of December 31,
2002.
General and administrative expenses for the nine months ended March 31,
2004 decreased approximately $88,000 (6%), compared to these expenses during the
nine months ended March 31, 2003. The decrease in expenses is due to decreases
in general and administrative personnel and related expenses, as well as a
decrease in rent expense as a result of a reduction in leased office space. This
decrease was partially offset by the recovery of accrued contingent expenses of
approximately $394,000 related to a favorable litigation settlement in December
2002. The recovery of those legal fees reduced the expenses in the nine months
ended March 31, 2003 in comparison to the current nine-month period. Excluding
this $394,000 recovery, general and administrative expenses for the nine months
ended March 31, 2004 decreased by approximately $482,000 (25%) compared to the
nine months ended March 31, 2003. During the nine months ended March 31, 2004,
the Company reduced its leased office space from one location of approximately
17,000 square feet to two locations totaling approximately 5,000 square feet,
thereby reducing its monthly expense for leased office space to approximately
$11,000 from approximately $40,000.
The settlement with former landlord, Plaza I-A, related to the termination
of an approximate $2.6 million remaining liability on our office lease
(including back rent and future lease obligations) during the nine months ended
March 31, 2004. This settlement expense included $360,000 for a four-year note
payable, approximately $143,000 in commissions 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 reversal of deferred
rent expense of approximately $87,000.
In conjunction with the termination of the office lease discussed above,
the Company moved its offices and data center. The loss on disposal of assets of
approximately $300,000, resulted from the sale of excess furniture and computer
equipment, partially offset by the proceeds from the sale.
Stock-based compensation of approximately $68,000 consisted of
approximately $20,000 due to the conversion of an incentive stock option to a
non-qualified stock option to a member of the Board of Directors and $48,000 for
the vesting of warrants granted to a consultant during the nine months ended
March 31, 2004. The grant of a non-qualified stock option to a consultant in
December 2002 resulted in stock-based compensation of approximately $2,000
during the nine months ended March 31, 2003.
Depreciation and amortization expense for the nine months ended March 31,
2004 was approximately $186,000 (33%) lower than the expense during the prior
year period. The decrease was due to the disposal of two asset groups that were
determined to be impaired in the fourth quarter of the fiscal year ended June
30, 2003, as well as the disposal of assets related to the office move and the
move of our data center to an offsite, hosted facility.
13
<page>
Other expense, net of other income, for the nine months ended March 31,
2004 decreased approximately $6,000, or 6%, compared to the nine months ended
March 31, 2003. The decrease was primarily due to the disposal of our Spanish
subsidiary in December 2002, partially offset by the increase in interest
expense on the bank financing agreement during the current nine-month period.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 31, 2004, we incurred an operating loss of
approximately $1,263,000 and a net loss of approximately $1,355,000. At March
31, 2004, we had a working capital deficit of approximately $782,000, compared
with a working capital deficit of approximately $399,000 at June 30, 2003. We
had a net stockholders' deficiency of approximately $467,000 at March 31, 2004,
compared to net stockholders' equity at June 30, 2003 of approximately $786,000.
The decrease in stockholders' equity is primarily due to the net loss incurred
during the nine months ended March 31, 2004, partially offset by the exercise of
stock options and stock-based compensation.
We had cash of approximately $345,000 at March 31, 2004, compared to
approximately $465,000 at June 30, 2003. For the nine months ended March 31,
2004, operating activities generated approximately $117,000 in cash. Investing
activities included capital expenditures of approximately $83,000 during the
nine months ended March 31, 2004, primarily for the migration of our production
data center to an offsite, hosted facility, and the receipt of approximately
$54,000 in proceeds from the sale of fixed assets. Further, we deposited
$360,000 in a certificate of deposit to secure a letter of credit from the Bank
(see "Notes Payable" in the Notes to Consolidated Financial Statements, above).
Financing activities generated approximately $152,000 in cash from the exercise
of stock options and funding from the Bank under the Financing Agreement,
entered into in December 2003 (see "Notes Payable" in the Notes to Consolidated
Financial Statements, above), partially offset by payments made on capital
leases.
The Company's future contractual obligations and commitments as of March
31, 2004 were as follows:
Amounts Due by Period:
2008 and
2004 2005 2006 2007 thereafter
-------------- --------------- -------------- -------------- ------------------
Operating Leases $34,282 $98,380 $80,731 $23,865 $ -
Capital Leases 21,222 45,037 20,219 5,055 -
Note Payable, Affiliate - - - - 856,954
Note Payable, Other - 60,000 120,000 120,000 60,000
-------------- --------------- -------------- -------------- ------------------
Total $55,504 $203,417 $220,950 $148,920 $ 916,954
Currently we are dependent on our cash reserves and accounts receivable
financing through the Bank to fund operations. We incurred net losses for the
nine months ended March 31, 2004, and the years ended June 30, 2003 and 2002 and
our revenue base has declined and continues to decline. 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
14
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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 $187,000 for the three months
ended March 31, 2004, compared to EBITDA of approximately $196,000 for the three
months ended March 31, 2003. EBITDA for the nine months ended March 31, 2004 was
a loss of approximately $516,000 compared to EBITDA of approximately $790,000
for the nine months ended March 31, 2003. The decrease for the current
nine-month period is primarily the result of the negotiated termination of an
operating lease.
The table below shows the reconciliation between net loss and EBITDA.
Three Months Nine Months
Ended March 31, Ended March 31,
2004 2003 2004 2003
Reconciliation to EBITDA: (amounts in thousands) (amounts in thousands)
-------------------------------------------------------------------
-------------------------------------------------------------------
Net Loss ($ 68) ($ 135) ($ 1,355) ($ 220)
Stock-based Compensation 16 - 68 2
Depreciation and Amortization 197 304 679 911
Interest/Other Expense 42 27 92 97
Income Taxes - - - -
----------------- ---------------- --------------- ---------------
EBITDA $ 187 $ 196 ($ 516) $ 790
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 generally accepted accounting
principles, and as a result, our measure of EBITDA might not be comparable to
similarly titled measures used by other companies.
However, we believe that EBITDA is relevant and useful information, which
is often reported and widely used by analysts, investors and other interested
parties in our industry. Accordingly, we are disclosing this information to
permit a more comprehensive analysis of our operating performance, as an
additional meaningful measure of performance and liquidity, and to provide
additional information with respect to our ability to meet future debt service,
capital expenditure and working capital requirements. See the audited financial
statements and notes thereto contained elsewhere in this report for more
detailed information.
15
<page>
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-14(c) and 15d-14(c)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
foregoing evaluation.
Part II. Other Information
Item 1. Legal Proceedings
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 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
16
<page>
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. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
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.
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.
17
<page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMTEX NEWS NETWORK, INC.
(Registrant)
Dated: May 17, 2004 By: /S/ C.W. GILLULY
C.W. Gilluly, Ed.D.
Chairman and Interim Chief Executive
Officer
(Principal Executive Officer)
By: /S/ MATTHEW BALL
Matthew Ball
Chief Financial Officer
(Principal Financial and Accounting
Officer)
18
<page>
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, C.W. Gilluly, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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.
May 17, 2004 /s/ C.W. Gilluly, Ed.D.
----------------------------------
C.W. Gilluly, Ed.D.
President and Chief Executive Officer
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 quarterly report on Form 10-Q 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.
May 17, 2004 /s/Matthew Ball
---------------------------
Matthew Ball
Chief Financial Officer
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 quarter ended March 31,
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.
May 17, 2004 /s/ C.W. Gilluly, Ed.D
-------------------------------------------
C.W. Gilluly, Ed.D.
Chief Executive Officer
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 quarter ended March 31, 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.
May 17, 2004 /s/ Matthew Ball
---------------------------
Matthew Ball
Principal Finance Officer
(Chief Financial Officer)