UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 2002; or
___ Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 0-10541
COMTEX NEWS NETWORK, INC.
(Exact name of registrant as specified in its charter)
New York 13-3055012__
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4900 Seminary Road, Suite 600, Alexandria, Virginia 22311
(Address of principal executive office)
Registrant's telephone number, including area code:
(703) 820-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of September 20, 2002, the aggregate market value of the
common stock held by non-affiliates of the Registrant (based upon
the last reported sale price of the common stock as reported by
the National Association of Securities Dealers Inc. through its
Electronic OTC Bulletin Board) was approximately $1,127,265.
As of September 20, 2002, 13,140,893 shares of the Common Stock
of the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in response to Part III of Form 10-K is
hereby incorporated by reference to the specified portions of the
registrant's Proxy Statement to be filed within 120 days of the
end of the fiscal year ended June 30, 2002.
PART I
This section should be read in conjunction with the
financial statements and notes thereto included elsewhere in this
annual report on Form 10-K. Except for the historical
information contained herein, the matters discussed in this 10-K
include forward-looking statements within the meaning of Section
21E of the Securities and Exchange Act of 1934. These forward-
looking statements may be identified by reference to a future
period or by use of forward-looking terminology such as
"anticipate," "expect," "could," "may" or other words of a
similar nature. Forward-looking statements, which we believe to
be reasonable and are made in good faith, are subject to certain
risks and uncertainties, including, but not limited to, those set
forth under "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS." These
risks could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on our
behalf.
Item 1. Business
Overview
We are a leading business-to-business "infomediary"
providing real-time news content from our worldwide network of
news publishers to our network of business information retailers,
or distributors, serving the financial services, individual and
institutional investor, wireless and corporate information
markets. We employ internally developed technology to process,
generally in less than 5 seconds, more than 20,000 real-time news
stories each day from approximately 70 newswire services and
other publishers. Our unique and uniform processing allows our
customers to more effectively select and utilize the content in
their products and services. Processing includes, for each news
story, conversion to NewsML, an industry standard format, and
indexing by category, keyword and ticker symbol.
Illustrated chart entitled, "COMTEX: Creating Value by
Connecting Two Powerful Networks" This chart shows (1) publishers
deliver content to COMTEX; (2) COMTEX provides one relationship,
one business model, one cotnractual agreement and one data link
to these publishers;(3) COMTEX delivers integrated, enhanced,
aggregated real-time news to its client base of distributors
through one relationship, in one format and one technical contact.
Our network of distributors includes over one thousand
information applications and web sites that require up-to-the-
minute information to meet the needs of their end-users and
customers. Our news stories, through these applications, reach
an audience of millions of end-users each month.
We license our news products to our distributors based upon
the economics of their business models. Our distributors are
responsible for developing their information applications and the
sales and marketing of their respective direct distribution
channels. We typically share in the revenues generated from the
distributors' sales and marketing investments. We then pay a
portion of our content-related revenue to our publisher
suppliers.
Our Partners
Network of Distributors. Our distributor partners integrate
our products into their content-based applications to provide
their end-users with relevant, timely and comprehensive global
business, economic and general news coverage. Our content
products, tailored to our distributors' specifications and market
requirements, are designed to contribute to the success of their
business models.
Contract terms with our distributors generally range from
one to three years. Our revenues are generated through various
models including fixed fee, royalty minimums and variable
royalties based on the growth and success of the distributor's
business model. We offer a variety of delivery options including
the Internet through file transfer protocol (FTP) and virtual
private networks (VPN), as well as various high-speed
technologies including leased line and frame relay. No
individual distributor provides more than 10% of our revenue.
Our distributor partners gain cost advantages by using us as
a single-source provider. As depicted in the chart above, they
gain access to only the content they need from approximately 70
news publishers with a single contract and royalty model, one
technical format to integrate and tagged with our standardized
metadata. Content is licensed on a topical or geographical basis,
making it more cost effective for distributors since they pay
only for the specific content that impacts their target audience.
Some of our current distributors include:
O Bloomberg
O CBS Marketwatch
O Dialog
O Factiva
O OneSource Information Services
O Screaming Media Inc./Stockpoint
O S&P Comstock
O Track Data
O Zacks Investment Research
Network of Publishers. Our newswire services and other
content providers supply us with the information that is the
foundation of our product offerings. Each of our content
providers generally offers a single editorial perspective and
area of coverage, which we aggregate with other providers'
content to create real-time and value-added topical news feeds
for our distributors. This content includes:
O Late-breaking domestic and international economic and
political news;
O Financial and business news;
O Company information, press releases and stock quotes and
charts; and
O Sports and entertainment news.
Through our network of distributors, our content providers
earn new revenue streams, reach millions of end-users, gain rapid
access to new markets and increase brand exposure. Our content
providers are able to significantly expand their reach, while our
distributors avoid the work and expense of aggregating content in
diverse formats from multiple sources. Further, our licensing
procedures address content providers' concerns over unauthorized
distribution and publishing. Our royalty model is highly
attractive to our content providers since it is based upon their
content's contribution to our products and the corresponding
revenues from our customers, which is unlike traditional models
where royalties are limited to only those generated from actual
use of the publishers' content by the end-user.
Contract terms with our content providers generally range
from one to three years and include the non-exclusive right to
license their content in our products to re-sellers and other
information distributors. This negotiated right is a significant
asset since it allows us to generate revenue based on the
extended end-user reach and business models of each of our
distributors, instead of depending upon the costly pursuit and
monetization of individual readers. In addition, the
distributors' marketing expenditures and product investments
generally enhance our revenues, and therefore our publishers'
royalties, without additional cost or effort. Costs associated
with these licenses include fixed fees, royalty minimums and/or
variable royalties paid to content providers based on our
information services revenue.
Some of our current providers include the following:
O The Associated Press
O Business Wire
O EDGAR Online
O Knight-Ridder/Tribune
O PBI Media Inc.
O PR Newswire
O United Press International
We also have agreements with a significant number of
internationally based news agencies including the following:
O AllAfrica, Inc.
O Asia Pulse
O Australasian Business Intelligence Abstracts (ABIX)
O AFX News
O Business News Americas, Ltda.
O EFE News Service
O Europa Press Internet
O Xinhua
Technology
During the 2000 fiscal year and the beginning of the 2001
fiscal year, we created and implemented Equinox, a real-time
content processing system designed to process and enhance more
than 100,000 real-time stories per day. Equinox provides improved
quality, reliability, packaging and, ultimately, usability of our
content.
As electronic submissions of news and information are
received, Equinox converts each story into a common data format;
applies standardized document coding, or metadata; assigns
relevant keywords from our proprietary taxonomy; and assigns
ticker symbols of any public companies mentioned in the story.
The metadata allows our customers to accurately and efficiently
direct the right content to the right users at the right time.
After the content processing has been completed, the system sorts
each news story into topic-defined product categories. All
content is processed and then distributed in real-time (generally
under 5 seconds without human intervention) to our customers via
XML or other specified format.
Equinox was designed to provide for the ongoing creation of
new topical products, standardized metadata and other content
enhancements without significantly impacting processing time or
requiring considerable development resources. Thus, we can add
new publishers and create new products from existing content
sources with minimal additional investment or ongoing cost.
Backup and redundancy investments in fiscal 2002, including
additional hardware and collocation facilities, have improved the
reliability of our system and minimized the risk of catastrophic
system or utility provider failures.
The News Solutions (R) product, an alternative to streaming
content delivery, provides our customers with the ability to
implement news-based applications with no content hosting on
their part and little or no development effort. News Solutions
now provides the ability to access and select content by product,
category, keyword, ticker symbol and/or full text search and
offers alerting services to end-users. News Solutions has also
been enhanced with a variety of formats and options such as the
display of 20-minute delayed stock quotes, price charts and
research information for each public company identified in a news
story.
Customers, Sales and Marketing
Our customers include business and consumer online services,
personal investor web sites, general information web sites, Wall
Street stock quote vendors, electronic clipping services and
wireless information services who create online products and
services using our content. These information services then
market these products and services to end-user markets, business
users and corporations. These end-users use our customers'
services for market research, business intelligence, investment
analysis and entertainment.
Our marketing strategy is to provide content and content
infrastructure to our customers who make their own investments in
product development and marketing. In this way, we increase the
value of our publishers' content with the investments of our
distributors. Our combined abilities deliver the right content
to the right reader at the right time. As a result, our news
content is exposed to a highly qualified audience of millions of
readers.
Our sales force is focused on selling to and supporting our
distributors in four primary markets in the United States and
Europe, including professional investors, individual investors,
Internet and corporate information services. The sales force
receives a base salary and earns commissions on both new
customers and revenue growth from existing customers. Our total
compensation plan is consistent with industry compensation
practices.
Product and Service Offerings
The core products currently include a series of topic-
defined real-time news products marketed under the brand name
CustomWires (R), editorially selected top news products under the
brand name COMTEX Newsroom (R) and complete publisher offerings
known as full feeds. These products may be delivered as a real-
time XML (or other format) streaming feed or imbedded in the
customers' browser-based application via our hosted delivery
application system, News Solutions (R). We also recently added an
alerting application available to our distributors, known as The
Ping (Tm). Each of these services is described in more detail below.
CustomWires (R)
CustomWires are topic-defined newswires that contain only
topic-relevant stories from more than 20,000 stories daily, from
approximately 70 publishing providers. Stories are selected by
automated editorial software according to the significance of the
story's content relative to specific CustomWires topics.
We offer twenty-six topics under the CustomWires brand name:
O Bonds O Healthcare
O Business O International
O Community O Market Beat
O Daily Beat O Olympic Beat
O Energy O Petroleum
O Enterprise Content Management O Pharmaceuticals
O Environment O Public Companies
O Equity Analysis O Securities Exchange Commission
O Finance O Spanish Select
O Foreign Business O Sports
O Foreign Exchange O Technology
O French Select O Wall Street
O Government O World Affairs
We also offer an additional eleven geographical CustomWires
focusing on specific international regions.
COMTEX Newsroom (R)
Our Newsroom products consist of editorially selected top
news stories in twelve categories. A broad range of news story
options includes financial markets, industries, general market
and world news. Our editors are skilled at evaluating incoming
news feeds for items that will directly affect business and
investment decisions in a variety of markets. This expertise
ensures that our customers receive relevant and compelling
content. The COMTEX Newsroom, Top Headlines, Front Page,
Financial Updates, Industry Updates and Personal Finance products
are designed to satisfy distributors interested in reaching a
broad audience of business end-users.
Top Headlines. Top Headlines is an editorial service that
selects up to five of the most significant news stories of the
day in each of twelve topic-based CustomWires, including:
O Business
O Community
O Energy
O Entertainment
O Environment
O Finance
O Government
O Healthcare
O Internet
O International
O Sports
O Technology
These stories are delivered five times every weekday. In
addition, International, Government, Business, Finance, Community
and Sports are updated once a day on Saturday and Sunday.
Front Page. Front Page is designed to reflect the front
page of major U.S. newspapers. Our editors select the day's top
ten news stories highlighting key global news, which is delivered
five times every weekday and once a day on weekends.
Financial Updates. Financial Updates keep businesses
informed of the financial market. Our editors deliver the most
relevant financial information from leading financial information
sources twice every weekday. They also provide the basic
overview, productivity and analysis for international and U.S.
stock markets and the global bond and fund markets and also
monitor key company mergers, acquisitions, stock buyouts, hostile
takeovers and all economic indicator announcements and data
releases.
Industry Updates. Industry Updates provide competitive
information by industry. Our editors select the top seven to ten
stories from each industry category and distribute them to
customers once a day on weekdays. These categories include
vertical industries such as Airlines, Automobile, Banking,
Hardware, Insurance, Oil, Publishing, Telecommunications and
Utilities.
Personal Finance. Personal Finance highlights personal
investment opportunities, banking, insurance, financial planning,
and financial security. Editors select five to seven stories
daily on weekdays, from well-known financial providers, to
deliver relevant information on stock tracking, credit
maintenance, taxes, home mortgage, online banking and a host of
other specific topics devised to meet the needs of the individual
investor.
Publisher Full Feeds
Our full feed delivery from a specific publisher provides
customers with the complete content offering from that publisher.
The content is delivered with our electronically enhanced
metadata, ticker symbols and standardized keywords, allowing the
customer to find the most relevant stories and use the content in
conjunction with other COMTEX content.
Our full feed distribution offers the same sole source
provider benefits as the CustomWires:
O conversion of publisher's content into NewsML, the standard
electronic format designed to enhance and facilitate the
integration of news content;
O addition of keywords, product codes, and ticker symbols
designed to increase usage of publisher's content;
O one integration effort for multiple publishers; and
O 24 by 7 monitoring by our technical staff of the publisher's
content
News Solutions (R)
During fiscal year 2001, we launched News Solutions, a suite
of browser-based news applications that customers can integrate
directly into their web site, intranet or extranet by inserting a
few lines of News Solutions-generated HTML compatible code. We
host all the content, the customer sets the content selection
criteria and the end-users see the intended real-time content.
News Solutions customers determine the specific news required for
their application from any of our product lines and place the
content on their site with little programming effort. News
Solutions implementation allows customers to maintain the look
and feel of their own web sites and refine the news categories to
display only the news that meets their needs.
The Ping (Tm)
The Ping is a real-time news alerting application that
delivers breaking news and critical stories based on our
distributors' end-users' specifications. End-users can visit the
distributor's site and set-up personal alerts on topics of
interest to them to be delivered to their email or mobile
devices. The Ping also delivers breaking news in four categories
- - general, business, entertainment and sports. Ticker symbols can
also be used as the basis for real-time alerts on specific
company announcements and news from a larger pool of content.
Product Development
Product development activities include quality assurance,
content product enhancements and the development of proprietary
news products. For the years ended June 30, 2002, 2001 and 2000
our product development costs were approximately $363,000,
$605,000 and $456,000, respectively. Expenses related to the
design and development of our content processing systems are not
included in these costs. In fiscal year 2002 the decrease in
costs resulted primarily from a reduction in personnel. During
fiscal years 2000 and 2001, we made significant investments in
product development infrastructure and development of new
products, as well as additional quality assurance activities.
Competition
Our competitors include Internet-focused aggregators and
distributors of content, individual national and international
electronic news and information services, and traditional content
providers seeking new markets for their content via direct
relationships with distributors. Our competition with these
providers is differentiated by the diversity of content,
technology solutions, pricing models offered and other "one stop
shop" advantages.
Employees
At September 20, 2002, we had approximately 46 full-time
employees. The employees are not members of a union and we
believe employee relations are generally good.
Available Information
We file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange
Commission, or SEC. You may read and copy any document we file at
the SEC's public reference rooms in Washington, D.C., New York,
New York, and Chicago, Illinois. Please call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms.
Our SEC filings are also available to the public from the SEC's
Web site at "http://www.sec.gov."
Item 2. Properties
We own no real estate. We lease office space at 4900
Seminary Road in Alexandria, Virginia. We currently occupy
approximately 24,000 square feet at an annual rental of
approximately $600,000. The lease agreement on approximately
7,000 square feet expires in August 2003. The lease on the
remaining space of approximately 17,000 square feet expires in
August 2008. In addition, our subsidiary, nFactory COMTEX, S.L.,
leases shared space in Madrid, Spain at a cost of approximately
$1,700 per month. This lease expires in December 2002.
Item 3. Legal Proceedings
On July 17, 2001, we filed a breach of contract action
against Infospace, Inc., a former customer, in the United States
District Court for the Eastern District of Virginia for payments
owed under contracts with the defendant corporation. The suit is
captioned Comtex News Network, Inc. v. Infospace, Inc. Case
Number CV01-1108-A. On August 13, 2001, Infospace filed an
Answer and Counterclaim alleging that Comtex breached its
agreement and sought damages for lost business, loss of
reputation and good will.
On March 11, 2002, the court rendered a directed verdict in
favor of Infospace on the breach of contract claim and Infospace
withdrew the counterclaim without prejudice. Infospace also
filed a petition with the court for reimbursement of attorneys'
fees and costs.
On April 9, 2002, we filed a Notice of Appeal to reverse the
lower court decision. The case is now fully briefed before the
United States Court of Appeals for the Fourth Circuit and we
expect a ruling sometime in early 2003.
While the appeal was pending, the court, on August 13, 2002,
issued an order awarding attorneys' fees of approximately
$393,000 to Infospace with costs still to be determined. We
intend to seek a stay of this award pending a ruling on the
appeal. If we prevail on the appeal, the award of attorneys'
fees would likely be reversed. Infospace also has petitioned the
court to require us to reimburse Infospace for approximately
$201,000 in costs. This petition is still pending before the
court. We have recorded an accrual in the year ended June 30,
2002, to provide for the estimated exposure upon resolution of
this matter.
We are 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 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Shares of our common stock, par value $.01 per share, which
we refer to herein as our Common Stock, are traded sporadically
under the symbol CMTX on the Over-the-Counter Bulletin Board of
the National Association of Securities Dealers, or OTCBB.
The range of high and low bid quotations for the Common
Stock, as reported on the OTCBB, for each quarterly period during
fiscal years 2001 and 2002 is shown below:
Fiscal Year Ended June 30, 2001 High Low
- ------------------------------- ---- -----
First Quarter
(7/1 to 9/30/00) 5.25 3.00
Second Quarter
(10/1 to 12/31/00) 3.56 1.50
Third Quarter
(1/1 to 3/31/01) 2.69 1.06
Fourth Quarter
(4/1 to 6/30/01) 1.60 0.73
Fiscal Year Ended June 30, 2002 High Low
- ------------------------------- ---- -----
First Quarter
(7/1 to 9/30/01) 0.83 0.26
Second Quarter
(10/1 to 12/31/01) 0.54 0.28
Third Quarter
(1/1 to 3/31/02) 0.75 0.41
Fourth Quarter
(4/1 to 6/30/02) 0.60 0.27
The approximate number of holders of record of our Common
Stock as of September 20, 2002 was 575.
We have never declared or paid a cash dividend on our Common
Stock and do not anticipate the declaration or payment of cash
dividends to shareholders in the foreseeable future.
Item 6. Selected Financial Data
The following table sets forth selected financial data for
each of our last five fiscal years.
Fiscal Year Ended June 30,
(amounts in thousands except per share data)
2002 2001 2000 1999 1998
---- ----- ----- ---- ----
Total Revenues $ 12,248 $ 16,598 $12,645 $ 7,557 $ 5,401
Operating (Loss)/Income $ (1,277) $ 310 $ 1,308 $ 542 $ 156
Net (Loss)/Income $ (1,361) $ 265 $ 1,241 $ 456 $ 64
Basic Net (Loss)/Income Per Share $ (.12) $ .03 $ .14 $ .06 $ .01
Diluted Net (Loss)/Income Per Share $ (.12) $ .02 $ .10 $ .04 $ .01
Balance Sheet Data at Year End:
Total Assets $ 5,600 $ 6,565 $ 5,977 $ 2,408 $ 1,434
Long-term Obligations $ 948 $ 954 $ 987 $ 1,047 $ 833
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Our revenues come primarily from charges to distributors for the
licensing of enhanced content, including CustomWires, Newsroom products and
the publishers' full feeds, as well as from News Solutions hosting services.
Distributor licenses typically consist of fixed fees as well as minimum
royalty commitments. Royalties are based upon our customers' business and
revenue models such that their success in their market generates increasing
revenues for us.
We are based in the United States and have a wholly owned subsidiary,
nFactory COMTEX, S.L. operating in Madrid, Spain. The subsidiary was formed
to expand our operations throughout Europe.
Application of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which have
been prepared in accordance with accounting policies generally accepted in
the United States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. We
believe the following critical accounting policies affect significant
judgments, estimates and assumptions used in the preparation of the
consolidated financial statements.
Revenue
Information services revenues are recognized as services are rendered
based on contractual terms such as usage, fixed fee, percentage of
distributor revenues or other pricing models. Start-up fee revenues, charges
for implementation and initial integration support of our products, are
recognized over the initial term of the contract pursuant to the SEC Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements.
Amounts received in advance are deferred and recognized over the service
period. Certain royalty revenues are estimated based on prior usage reports
and adjusted accordingly upon reporting from customers.
Long-lived Assets, Including Capitalized Software
We evaluate, on a quarterly basis, our long-lived assets to be held and
used, including capitalized software, to determine whether any events or
changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. We base our evaluation on certain impairment indicators,
such as the nature of the assets, the future economic benefit of the assets,
any historical or future profitability measurements, as well as other
external market conditions or factors that may be present. If these
impairment indicators are present or other factors exist that indicate that
the carrying amount of the asset may not be recoverable, we then use an
estimate of the undiscounted value of expected future operating cash flows to
determine whether the asset is recoverable and measure the amount of any
impairment as the difference between the carrying amount of the asset and its
estimated fair value. The fair value is estimated using valuation techniques
such as market prices for similar assets or discounted future operating cash
flows.
Contingencies
From time to time, we are subject to proceedings, lawsuits and other
claims related to labor and other matters. We are required to assess the
likelihood of any adverse judgments or outcomes to these contingencies as
well as potential ranges of probable losses and establish reserves
accordingly. The amounts of reserve required, if any, may change in future
periods due to new developments in each matter or changes in approach to a
matter such as a change in settlement strategy.
RESULTS OF OPERATIONS
Comparison of the Fiscal Year ended June 30, 2002 to the Fiscal Year ended
June 30, 2001
Revenues consist primarily of royalty revenues and fees from the
licensing of content products to information distributors. During the year
ended June 30, 2002, our total revenues were approximately $12,248,000, a
decrease of approximately $4,350,000, or 26%, from total revenues of
approximately $16,598,000 for the year ended June 30, 2001. The decline in
revenues is the direct result of business shut downs and consolidation among
clients, primarily in the Internet and personal investor markets. In
addition, revenues from new customers in the current fiscal year were less
than the revenues generated from new customers in the prior fiscal year.
Our cost of revenues consists primarily of content licensing fees and
royalties to content providers, as well as data communication costs for the
delivery of our products to customers. The cost of revenues for the year
ended June 30, 2002 was approximately $4,058,000, a decrease of approximately
$620,000, or 13%, from the cost of revenues for the year ended June 30, 2001.
The decrease in cost is primarily due to the decrease in content royalties as
a result of decreased revenues for the period. The decrease in content
royalties is limited by required minimum fees paid to certain information
providers and therefore, does not directly track the decrease in revenues.
The gross profit for the year ended June 30, 2002 was approximately
$8,189,000, a decrease of approximately $3,730,000, or 31%, over the prior
year. The gross margin percentage declined for the year ended June 30, 2002
to approximately 67% from approximately 72% in the prior year. The decline
is based on the decrease in revenues without a corresponding decrease in
content royalties as discussed above.
Total operating expenses for the year ended June 30, 2002 were
approximately $9,466,000, a decrease of approximately $2,143,000, or 18%,
from the operating expenses for the year ended June 30, 2001. The decrease
in operating expenses reflects reductions in personnel across all
departments, reduced sales and marketing expenses and a decrease in stock-
based compensation. These expense reductions were implemented in response to
a decline in revenue over the previous twelve months. The decrease in
operating expenses was partially offset by increased consulting activities
aimed at exploring business development opportunities, expenses related to
our European subsidiary, increased legal and accounting fees and an increase
in depreciation and amortization expense.
Technical operations and support expenses during the year ended June 30,
2002 decreased approximately $1,012,000, or 31%, from these expenses in the
year ended June 30, 2001. This decrease resulted from a decrease in
personnel, computer parts, software maintenance and consulting expenses. The
decrease in expenses also includes an adjustment to software expense related
to the return of certain software and renegotiated license fees.
Product development expenses decreased by approximately $242,000, or
40%, for the year ended June 30, 2002 compared to the year ended June 30,
2001. This decrease is the result of personnel reductions in this
department. Product development activities include quality assurance,
enhancements to our products and the development of proprietary news
products.
Sales and marketing expenses decreased by approximately $1,255,000, or
46%, for the year ended June 30, 2002 compared to the year ended June 30,
2001. This decrease is the result of a reduction in personnel, decreases in
advertising and promotional activities, public relations expenses and sales
commissions. In addition, travel, entertainment and conference costs were
significantly lower in the current year compared to the previous year. The
decrease in expenses was slightly offset by the sales and marketing expenses
of our European subsidiary.
General and administrative expenses for the year ended June 30, 2002
were approximately $334,000, or 8%, greater than these expenses during the
year ended June 30, 2001. This increase in expenses resulted from increases
in legal and accounting fees for litigation issues and SEC filings,
consulting activities to explore business development opportunities and Board
of Directors fees related to additional meetings. The increase was partially
offset by decreases in personnel and related costs including recruiting,
employee relations and office supplies.
In connection with the transfer of stock options from the Chairman of
our Board of Directors to certain employees, we recorded stock-based
compensation expense of approximately $7,000 during the year ended June 30,
2002, compared to approximately $315,000 for the year ended June 30, 2001.
The decrease in stock-based compensation is a result of the decrease in the
fair market value of our common stock as of the dates of transfer.
Depreciation and amortization expenses for the year ended June 30, 2002
were approximately $340,000, or 44%, higher than these expenses during the
prior year. The increase was due primarily to the deployment of upgraded
production software and hardware in the Spring of 2001 and increased capital
expenditures related to increasing the capacity and redundancy of the
production systems over the past twelve months.
Other expense, net of interest income and interest expense, increased
approximately $41,000, or 96%, during the year ended June 30, 2002 from the
prior year. This increase was due to reduced interest earned on lower cash
balances.
Comparison of the Fiscal Year ended June 30, 2001 to the Fiscal Year ended
June 30, 2000
Revenues consist primarily of royalty revenues and fees from the
licensing of content products to information distributors. During the year
ended June 30, 2001, our total revenues were approximately $16,598,000, an
increase of approximately $3,952,000, or 31%, from total revenues of
$12,645,000 for the year ended June 30, 2000. Our revenues from new
customers were partially offset by a decline in revenues from existing
customers. Many of these customers were in the internet and personal
investor markets who declared bankruptcy or who were unable to obtain funding
and remain in business.
Our cost of revenues consists primarily of content licensing fees and
royalties to content providers, as well as data communication costs for the
delivery of our products to customers. The cost of revenues for the year
ended June 30, 2001 was approximately $4,678,000, an increase of
approximately $856,000, or 22%, from the cost of revenues for the year ended
June 30, 2000. The increase in cost was primarily due to an increase in
content royalties related to the increase in revenues for the period.
The increase was offset partially by decreases in data communications costs
resulting from the continued implementation of more cost-effective vehicles
for the delivery of our products to our customers. With the increased
reliability and industry-wide acceptance of the internet, we transitioned
customers from higher cost satellite/FM and leased line deliveries to internet
delivery of our content.
The gross profit for the year ended June 30, 2001 was approximately
$11,920,000, an increase of approximately $3,097,000, or 35%, over the prior
year. The gross margin percentage improved for the year ended June 30, 2001
to approximately 72% from approximately 70% in the prior year due to the
decrease in data communications costs discussed above.
Total operating expenses for the year ended June 30, 2001 were
approximately $11,609,000, an increase of approximately $4,095,000, or 54%,
from the operating expenses for the year ended June 30, 2000. This increase
in operating expenses included increases in expenses associated with the
addition of personnel and technology to support increased distributors and
content providers; increases in marketing and public relations activities;
and expenditures to promote COMTEX and our products and services. In
addition, we incurred an increase of approximately $315,000 in stock-based
compensation.
Technical operations and support expenses during the year ended June 30,
2001 increased approximately $1,131,000, or 54%, over these expenses in the
year ended June 30, 2000. This increase was due primarily to increased
personnel, software and maintenance expenses, offset partially by decreased
consulting expenses related to software support of our former content-
processing platform.
Product development expenses increased by approximately $150,000, or
33%, for the year ended June 30, 2001 compared to the year ended June 30,
2000. This increase was the result of additional personnel and related
expenses. Product development activities include quality assurance,
enhancements to our products, and the development of proprietary news
products.
Sales and marketing expenses increased by approximately $429,000, or
19%, for the year ended June 30, 2001 compared to the year ended June 30,
2000. This increase was due to the addition of sales and marketing personnel
and advertising and public relations expenses related to the promotion and
branding of COMTEX and our products and services.
General and administrative expenses for the year ended June 30, 2001
were approximately $1,540,000, or 64%, greater than these expenses during the
year ended June 30, 2000. This increase was due to additional personnel and
related expenses, increased legal fees and investor relations consulting,
expanded office space and an increase of approximately $598,000 in the
provision for bad debts. The increase in bad debt expense related in large
part to the loss of customers due to their lack of funding and/or
bankruptcies.
In connection with the transfer of stock options from the chairman of
our board of directors to certain employees, we recorded stock-based
compensation expense of approximately $315,000 during the year ended June 30,
2001. We did not record stock-based compensation during fiscal year 2000.
Depreciation and amortization expenses for the year ended June 30, 2001
were approximately $531,000, or 218% higher than these expenses during the
prior year. The increase was due primarily to the deployment of upgraded
production software and hardware and increased capital expenditures related
to increasing capacity and redundancy of our production systems, as well as
furniture and equipment for the addition of personnel.
Other expense, net of interest income and interest expense, decreased
approximately $24,000, or 36%, during the year ended June 30, 2001 from the
prior year, reflecting an increase in interest income earned on our cash
balances.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 2002, we incurred an operating loss of
approximately $1,277,000 and a net loss of approximately $1,361,000. At June
30, 2002, we had a working capital deficit of approximately $408,000 as
compared with working capital of approximately $131,000 at June 30, 2001. The
decrease in working capital was due primarily to the accrual of estimated
fees related to the Infospace lawsuit as well as the use of cash for capital
expenditures and contributions to our subsidiary, as discussed below. We had
net stockholders' equity of approximately $2,100,000 at June 30, 2002, as
compared to net stockholders' equity at June 30, 2001, of approximately
$3,109,000. The decrease in stockholders' equity was due primarily to the
net loss incurred during the fiscal year ended June 30, 2002, partially
offset by the exercise of stock options, and the issuance of stock under the
Employee Stock Purchase Plan.
For the year ended June 30, 2002, our operating activities generated
approximately $773,000 in cash. We had cash of approximately $861,000 at
June 30, 2002, compared to approximately $367,000 at June 30, 2001.
We made capital expenditures of approximately $582,000 in the year ended
June 30, 2002, primarily for software licensing and the development of
software for internal use, compared to $2,684,000 for the same period ended
June 30, 2001. These investments improve our product capabilities,
reliability and our ability to meet future content and client processing
requirements. We expect capital expenditures to remain at or below the
fiscal year 2002 level for the next fiscal year.
We have experienced a significant loss of annuity revenue due to failing
businesses, bankruptcies or lack of funding and consolidation within our
customer base over the past 18 months. We have responded to this market
dynamic by initiating appropriate operating expense reductions and expansion
of our products to promote to our existing customers, as well as to diversify
the markets we serve.
In June 2001, we obtained a $500,000 line of credit to assist us with
short-term fluctuations in cash flow, if necessary. The line of credit bore
interest at the Prime Rate and expired June 29, 2002. We did not utilize
this facility. In addition, we obtained a $50,000 three-year financing
agreement to purchase software and related maintenance with Compaq Financial
Services that expires April 2005.
In August 2001, we signed an amendment to the 10% Senior Subordinated
and Secured Note payable to AMASYS Corporation ("AMASYS"), extending the due
date of the note from July 1, 2002 to July 1, 2008. Included in the
amendment is a provision for AMASYS to convert all or a portion of the
outstanding principal amount, plus accrued interest, into common stock of
COMTEX. The note is convertible at a price of $1.00 per share, which price
increases by $0.10 upon each anniversary of the amendment. There is no
restriction on the number of shares that may be issued upon conversion of the
note.
During the second quarter of fiscal year 2002, our wholly owned
subsidiary, nFactory COMTEX, S.L., located in Madrid, Spain, began
operations. The subsidiary was formed to sell existing COMTEX products to
clients in Western Europe and establish a customer foundation for selected
new product initiatives. The effective date of the agency agreement between
COMTEX and the subsidiary is May 1, 2002. All payments made to or on behalf
of the subsidiary prior to that date are recorded as capital contributions.
For the year ended June 30, 2002, we made capital contributions of
approximately $212,000. The financial statements included with this annual
report present the consolidated financial results of COMTEX and its
subsidiary.
The Company's future contractual obligations and commitments as of June 30,
2002 are as follows:
Amounts Due by Period:
2008 and
2003 2004 2005 2006 2007 thereafter
------------------------------------------------------------------
Operating Leases $591,718 $495,583 $484,019 $498,540 $513,496 $617,493
Capital Leases 21,060 21,060 17,550 0 0 0
Note Payable 0 0 0 0 0 914,954
------------------------------------------------------------------
Total $612,778 $516,643 $501,569 $498,540 $513,496 $1,532,447
Currently, our operations generate cash flow sufficient to cover
our monthly expenses and we believe that cash from operations will
provide us with adequate cash resources to meet our obligations on a
short-term basis. Our ability to meet our liquidity needs on a long-term
basis depends on our ability to generate sufficient revenues and cash to
cover our current obligations and to pay down our current and long-term
debt obligations. Any further corporate consolidation or market
deterioration affecting our customers could limit our ability to
generate such revenues. No assurance may be given that we will be able
to maintain the revenue base or the size of profitable operations that
may be necessary to achieve our liquidity needs.
EBITDA, as defined below, decreased approximately 111% to a loss of
approximately $156,000 for the year ended June 30, 2002 compared to a
positive $1,398,000 for fiscal year 2001. The decrease is due to the
decline in revenues and gross profit margin as well as an increase in
legal fees, offset partially by decreased operating expenses, excluding
stock-based compensation, depreciation and amortization.
EBITDA consists of earnings before interest expense, interest and
other income, income taxes, stock-based compensation and 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.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in our common stock involves a high degree of risk.
The following risk factors should be considered carefully in evaluating
COMTEX News Network and our business. Additional risks and
uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations. Our financial
condition, operating results and the trading price of our common stock
could be materially, adversely affected due to any of these risks, in
which case you could lose all or part of your investment. In assessing
these risks, you should also refer to the other information in this and
our other public filings, including our financial statements and notes
thereto.
We Depend On the Continued Growth In the Use of the Internet,
Particularly For News and Financial Information
Our business depends on businesses and individual consumers
continuing to increase their use of the Internet for obtaining news and
financial information. Internet usage may be inhibited for a number of
reasons including inadequate network infrastructure; security concerns;
inconsistent quality of service; and availability of cost-effective,
high-speed service. Because the market for our products is rapidly
evolving, it is difficult to predict with any certainty the growth rate,
if any, and the ultimate size of our markets. If the market fails to
continue to develop, develops more slowly than expected or becomes
saturated with competitors; if our services do not maintain significant
market acceptance; if our customers' business models are not successful;
or if pricing becomes subject to considerable competitive pressures; our
business operations and financial condition would be materially,
adversely affected.
We Face Intense Competition That Could Impede Our Ability to Grow and
Maintain Profitability
The business information services industry is intensely competitive
and is characterized by rapid technological change and entry into the
field by large and well-capitalized companies. Many of our competitors
have substantially greater financial, technical and marketing resources
than we do. Our competitors include Internet-focused aggregators and
distributors of content, individual national and international
electronic news and information services, and traditional content
providers seeking new markets for their content or seeking direct
relationships with distributors.
We expect competition to continue to increase as the market for
content aggregation increases, as current competitors improve their
offerings, as new competitors attempt to enter the market, and as
traditional content providers seek new markets for their content and
direct relationships with distributors. While we believe our continued
investment in content, new products and technology, as well as the
expansion of our distributor partnerships will continue to favorably
position us in the market, it is possible that our competitors may
acquire significant market share and we may not be able to retain our
customers.
Furthermore, increased competition on the basis of price, delivery
systems or otherwise, may require us to implement price reductions or
increase our spending on marketing or software development, which could
have a material, adverse affect on our business and operating results.
If We Are Unable to Maintain Our Reputation and Expand Our Name
Recognition, We May Have Difficulty Attracting New Business and
Retaining Current Customers and Employees
We believe that establishing and maintaining a good reputation and
name recognition are critical for attracting and retaining customers and
employees. We believe that the importance of reputation and name
recognition will increase due to the growing number of providers of
Internet services. If our reputation is damaged or if potential
customers are not familiar with us, we may be unable to attract new, or
retain existing, customers and employees. Promotion and enhancement of
our name will depend largely on our success in continuing to provide
effective services. If customers do not perceive our services to be
effective or of high quality, our brand name and reputation will suffer.
Some of Our Customers Are Recently Established Internet Companies Who
Pose Credit Risks
While we continue to attract and retain large and mid-sized,
established customers, a number of our customers are smaller Internet
companies with limited operating histories, who operate at a loss and
have limited cash reserves and limited access to additional capital.
With some of these customers, we have experienced difficulties
collecting accounts receivable. In addition, we lost some customers
directly due to the failure of their business models to sustain
operations. We may continue to encounter these difficulties in the
future. If any significant part of our customer base continues to
experience economic difficulties or is unable to pay our fees, for any
reason, our business would be materially, adversely affected.
We Could Face Additional Risks and Challenges as We Expand
Internationally and May Face Unexpected Costs in Developing
International Revenues
We have created a foreign subsidiary corporation in anticipation of
expanding our international presence. If our revenues from international
operations do not exceed the expense of maintaining these operations,
our business, financial condition and operating results may be
materially, adversely affected. We have only limited experience in
international operations and we may not be able to capitalize on our
investment in these markets.
In addition, there are risks inherent in doing business
internationally, including the following:
O unexpected changes in regulatory requirements
O potentially adverse tax consequences
O export restrictions and controls
O tariffs and other trade barriers
O difficulties in staffing and managing foreign operations
O political instability
O fluctuations in currency exchange rates
O seasonal reductions in business activity during the summer months.
Any of these risks could have a material, adverse affect on the success
of our international operations and on our business, financial condition
and operating results.
Unauthorized Break-ins to Our Systems Could Harm Our Business
Although we have implemented strict security policies and perimeter
defenses, our computer and telecommunications systems are vulnerable to
computer viruses, physical or electronic break-ins and similar
disruptions, which could lead to interruptions in, delays in or loss of
data. In addition, unauthorized persons may improperly access our data.
Any intrusions may harm us and may be very expensive to remedy and could
damage our reputation and discourage new and existing customers from
using our service.
If Equipment Failures Interrupt the Distribution of Content to Our
Customers, We Could Lose Customers and Our Reputation May Be Adversely
Affected
We rely on third-party telecommunications networks for the
distribution of our content. Any failure of these networks could
interrupt or delay our service, which could lead to customers canceling
contracts and could damage our reputation and our ability to attract
additional customers.
Substantially all of our computer and communications hardware
resides in one location in Alexandria, Virginia. Any disaster, power
outage or system failure that causes interruptions in our ability to
provide our services to our customers could reduce customer satisfaction
and our ability to attract additional customers.
Losing Major Content Providers May Leave Us With Insufficient Breadth Of
Content To Retain And Attract Customers
We do not generate original content and are therefore highly
dependent upon third-party content providers. If we were to lose one of
our major content providers and were not able to obtain similar content
from another source, our services would be less attractive to customers.
In addition, we cannot be certain that we will be able to license
content from our current or new providers on favorable terms in the
future, if at all.
We Depend on Key Personnel
Our future success will depend to a significant extent on the
continued services of our senior management and other key personnel. We
do not maintain "key person" life insurance for any of our personnel.
Our future success will also depend on our ability to attract, retain
and motivate other highly skilled employees. Companies in our industry
compete intensely to hire and retain qualified personnel and if we are
not able to attract the employees we need or retain the services of
those we have hired, our business operations would be materially,
adversely affected.
Our Common Stock Price is Volatile and Could Fluctuate Significantly
The trading price of our Common Stock has been, and may continue to
be, subject to wide fluctuations. Our stock is traded on the OTCBB,
which limits our exposure to market analysts, and in turn may limit our
volume of trading. During fiscal year 2002, the closing prices of our
Common Stock ranged from $0.26 to $0.83. Our stock price may fluctuate
in response to a number of events and factors, such as the following:
O quarterly variations in operating results
O announcements of technological innovations or new products by us
or our competitors
O the operating and stock price performance of other companies that
investors may deem comparable
O news reports relating to trends in our markets.
In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme
volatility that often has been unrelated to the operating performance of
such companies. These broad market and industry fluctuations may
adversely affect the price of our Common Stock, regardless of our
operating performance.
Potential Acquisitions and Strategic Investments May Result in Increased
Expenses, Difficulties in Integrating Target Companies and Diversion of
Management's Attention
We anticipate that from time to time, we may consider acquisitions
of assets or businesses that we believe may enable us to obtain
complementary skills and capabilities, offer new services, expand our
customer base or obtain other competitive advantages. Growth through
acquisitions involves potential risks, including, but not limited to,
the following:
O the diversion of management's attention during the acquisition
process
O costs, delays and difficulties of integrating the acquired
company's operations, technology and personnel into our
operations
O the adverse affect on earnings of amortizing any intangible
assets acquired
O the issuance of new equity securities diluting the holdings of
existing stockholders
O the uncertainty of working with new employees and customers.
We Do Not Intend to Pay Dividends
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain any future earnings for funding
growth and, therefore, do not expect to pay any cash dividends in the
foreseeable future.
Our Executive Officers, Directors and 5% or Greater Stockholders
Significantly Influence All Matters Requiring Stockholder Vote
Our executive officers and directors, in the aggregate,
beneficially own approximately 50% of our outstanding common stock. As
a result, our executive officers and directors are able to significantly
influence the outcome of all matters requiring approval by our
stockholders, including the election of directors and approval of
significant transactions. This concentration of ownership could delay,
deter or prevent a change of control and could adversely affect the
price that investors are willing to pay in the future for shares of our
common stock.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
We are exposed to various market risks, including changes in
foreign currency exchange rates. However, our exposure to currency
exchange rate fluctuations has been and is expected to continue to be
modest due to the fact that the operations of our Spanish subsidiary are
almost exclusively conducted in local currency. Operating results are
translated into U.S. dollars and consolidated for reporting purposes.
The impact of currency exchange rate movements as of June 30, 2002 was
not material. We do not engage in hedging activities.
Item 8. Financial Statements and Supplementary Data
The information required by this item is set forth under Item 15,
which is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
The information required by Items 10, 11, 12, 13 and 14 of Part III
of Form 10-K has been omitted in reliance on General Instruction G(3) to
Form 10-K and is incorporated herein by reference to our proxy statement
to be filed with the Securities and Exchange Commission ("SEC") pursuant
to Regulation 14A promulgated under the Securities Exchange Act of 1934,
as amended.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) 1. Financial Statements
Report of Independent Auditors F-1
Balance Sheets at June 30, 2002 and 2001 F-2
Statements of Operations for the fiscal
years ended June 30, 2002, 2001, and 2000 F-3
Statements of Stockholders' Equity (Deficit)
for the fiscal years ended June 30, 2002,
2001 and 2000 F-4
Statements of Cash Flows for the fiscal
years ended June 30, 2002, 2001 and 2000 F-5
Notes to Financial Statements F-6
2. Financial Statement Schedules
The schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
(b) Reports on Form 8-K
None
(c) Exhibits
3.1 Restated Certificate of Incorporation of the
Company, (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 2-72408
NY), declared effective on July 22, 1981).
3.2 Certificate of Amendment of Certificate of
Incorporation of the Company effective May 14, 1996
(incorporated by reference to Form 10-K dated June 30,
1996).
3.3 Amended and Restated By-Laws of the Company
(incorporated by reference to Form 10-K dated June 30,
1997).
10.4 Stock Option Agreement between the Company
and C.W. Gilluly and Marny Gilluly, dated May 16, 1995
(incorporated by reference to the Company's Quarterly
Report on Form 10-Q dated March 31, 1995).
10.6 Agreement between Infotechnology, Inc. and
the Company, dated May 16, 1995 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q
dated March 31,1995).
10.8 Amended, Consolidated and Restated 10%
Senior Subordinated Secured Note, dated May 16, 1995
(incorporated by reference to the Company's Quarterly
Report on Form 10-Q Dated March 31, 1995).
10.9 Comtex Scientific Corporation 1995 Stock
Option Plan (incorporated by reference to the Company's
Proxy Statement dated November 9, 1995).
10.10 Lease Agreement between Plaza IA Associates
Limited Partnership and the Company dated April 6, 1996
(incorporated by reference to the Company's Quarterly
Report on Form 10-Q dated March 31, 1996).
10.14 Employment Agreement with Charles W. Terry
dated July 29, 1994 (incorporated by reference to
Company's Form 10-Q dated September 30, 1998).
10.15 First Allonge to Amended, Consolidated and Restated 10%
Senior Subordinated Secured Note between the Company
and AMASYS Corporation dated as of June 30, 1999
(incorporated by reference to Company's Form 10-K
dated June 30, 1999).
10.16 First Amendment to Comtex Scientific Corporation 1995
Stock Option Plan, effective September 15, 1997,
dated February 7, 2000 (incorporated by reference
to Company's Form 10-K dated June 30, 2001).
10.17 Second Amendment to Comtex Scientific Corporation 1995
Stock Option Plan, effective December 2, 1999,
dated February 7, 2000 (incorporated by reference
to Company's Form 10-K dated June 30, 2001).
10.18 Third Amendment to Comtex News Network, Inc. 1995
Stock Option Plan, effective December 7, 2000,
dated June 1, 2001 (incorporated by reference to
Company's Form 10-K dated June 30, 2001).
10.19 Second Amendment to Amended, Consolidated and Restated
10% Senior Subordinated Secured Note between the Company
and AMASYS Corporation dated as of August 31, 2001
(incorporated by reference to Company's Form 10-K
dated June 30, 2001).
10.20 First Amendment to Employment Agreement with
Charles W. Terry dated October 1, 2001
(incorporated by reference to the Company's
Quarterly Report on Form 10-Q dated September 30, 2001).
10.21 Second Amendment to Employment Agreement with
Charles W. Terry dated September 10, 2002.
21 Subsidiaries of the Registrant (incorporated by
reference to the Company's Quarterly Report on
Form 10-Q dated December 31, 2001)
23 Consent of Independent Auditors.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 30, 2002
COMTEX NEWS NETWORK, INC.
By: /s/ Charles W. Terry By: /s/ Robin Y. Deal
Charles W. Terry Robin Y. Deal
President and Chief Executive Vice President, Finance &
Officer Accounting
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
DIRECTORS:
Signature Title Date
/s/ C.W. Gilluly, Ed.D. Chairman September 30, 2002
C.W. Gilluly, Ed.D. and Director
/s/ John S. Brunette Director September 30, 2002
John S. Brunette
/s/ Erik Hendricks Director September 30, 2002
Erik Hendricks
/s/ Robert A. Nigro Director September 30, 2002
Robert A. Nigro
/s/ Charles W. Terry Director, September 30, 2002
Charles W. Terry President and CEO
CERTIFICATIONS*
I, Charles W. Terry, certify that:
1. I have reviewed this annual report on Form 10-K of Comtex News
Network, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual report;
Date: September 30, 2002 /s/ Charles W. Terry
President and Chief Executive Officer
I, Robin Y. Deal, certify that:
1. I have reviewed this annual report on Form 10-K of Comtex News
Network, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual report;
Date: September 30, 2002 /s/ Robin Y. Deal
Vice President, Finance & Accounting
* Pursuant to the transition provisions of Rules 13a-14 and 15d-14,
paragraphs (b)(4), (5) and (6) of these certifications are omitted, as
the reporting period covered by the annual report for which these
certifications are made ended prior to the effective date of Rules 13a-
14 and 15d-14.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Charles W. Terry, the President and Chief Executive
Officer of Comtex News Network, Inc. (the "Company"), has executed this
certification in connection with the filing with the Securities and
Exchange Commission of the Company's Annual Report on Form 10-K for the
period ending June 30, 2002 (the "Report"). The undersigned hereby
certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: September 30, 2002 /s/ Charles W. Terry
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Robin Y. Deal, the Vice President, Finance and
Accounting of Comtex News Network, Inc. (the "Company"), has executed
this certification in connection with the filing with the Securities and
Exchange Commission of the Company's Annual Report on Form 10-K for the
period ending June 30, 2002 (the "Report"). The undersigned hereby
certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: September 30, 2002 /s/ Robin Y. Deal
Vice President, Finance & Accounting
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
COMTEX News Network, Inc.
We have audited the accompanying consolidated balance sheets of
COMTEX News Network, Inc. as of June 30, 2002 and 2001 and the
related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the three years in
the period ended June 30, 2002. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of COMTEX News Network, Inc. at June 30, 2002
and 2001, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June
30, 2002, in conformity with accounting principles generally
accepted in the United States.
/s/Ernst & Young LLP
McLean, Virginia
August 29, 2002
COMTEX NEWS NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 and 2001
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 860,548 $ 367,493
Accounts Receivable, Net of Allowance of approximately $300,000
and $554,000 at June 30, 2002 and June 30, 2001, respectively 1,071,717 1,904,409
Prepaid Expenses and Other Current Assets 211,673 360,686
------------- -------------
TOTAL CURRENT ASSETS 2,143,938 2,632,588
PROPERTY AND EQUIPMENT, NET 3,245,026 3,730,653
DEPOSITS AND OTHER ASSETS 210,747 201,802
------------- -------------
TOTAL ASSETS $ 5,599,711 $ 6,565,043
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 2,433,982 $ 2,170,385
Deferred Revenue 102,987 331,449
Capital Lease Obligations, Current 14,492 -
------------- -------------
TOTAL CURRENT LIABILITIES 2,551,461 2,501,834
LONG-TERM LIABILITIES:
Capital Lease Obligations, Long-Term 33,307 -
Long-Term Note Payable - Affiliate 914,954 953,954
------------- -------------
TOTAL LONG-TERM LIABILITIES 948,261 953,954
------------- -------------
TOTAL LIABILITIES 3,499,722 3,455,788
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000; Shares
Shares issued and outstanding: 13,140,893 and 10,191,373,
respectively 131,409 101,914
Additional Capital 12,192,973 11,867,469
Accumulated Deficit (10,221,151) (8,860,128)
Foreign Currency Translation Adjustment (3,242) -
------------- -------------
Total Stockholders' Equity 2,099,989 3,109,255
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,599,711 $ 6,565,043
============= =============
The accompanying "Notes to Consolidated Financial Statements"
are an integral part of these consolidated financial statements
F-2
COMTEX NEWS NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended June 30,
2002 2001 2000
------------- ------------- -------------
Revenues $12,247,694 $ 16,597,518 $12,645,344
Cost of Revenues 4,058,389 4,677,945 3,822,385
------------- ------------- -------------
Gross Profit 8,189,305 11,919,573 8,822,959
Operating Expenses
Technical Operations & Support 2,230,210 3,242,673 2,111,843
Product Development 363,185 605,433 455,834
Sales and Marketing 1,454,981 2,710,316 2,281,350
General and Administrative 4,296,970 3,962,681 2,422,394
Stock-based Compensation 6,678 314,600 -
Depreciation and Amortization 1,114,158 773,672 243,075
------------- ------------- -------------
Total Operating Expenses 9,466,182 11,609,375 7,514,496
------------- ------------- -------------
Operating Income/(Loss) (1,276,877) 310,198 1,308,463
Other income/(expense)
Interest Expense (95,689) (102,698) (106,121)
Interest Income 10,354 68,915 52,586
Other Income/(Expense) 1,614 (8,859) (12,987)
------------- ------------- -------------
Other Expense, net (83,721) (42,642) (66,522)
------------- ------------- -------------
Income/(Loss) Before Income Taxes (1,360,598) 267,556 1,241,941
Income Taxes 425 2,103 444
------------- ------------- -------------
Net Income/(Loss) $(1,361,023) $ 265,453 $ 1,241,497
============= ============= =============
Basic Earnings/(Loss) Per Common Share $ (.12) $ .03 $ .14
============= ============= =============
Weighted Average Number of Common Shares 11,348,923 10,026,735 9,051,214
============= ============= =============
Diluted Earnings/(Loss) Per Common Share $ (.12) $ .02 $ .10
============= ============= =============
Weighted Average Number of Shares Assuming Dilution 11,348,923 13,969,090 1 2,669,045
============= ============= =============
The accompanying "Notes to Consolidated Financial Statements"
are an integral part of these consolidated financial statements
F-3
COMTEX NEWS NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE FISCAL YEARS ENDED
JUNE 30, 2002, 2001 AND 2000
Common Shares Outstanding
--------------------------------------
Number of Par Additional
Shares Value Capital
---------------- ---------------- ----------------
Balance at June 30, 1999 8,124,430 $ 81,244 $ 10,031,801
Exercise of Stock Options 524,647 5,247 75,043
Issuance of Stock - ESPP 18,820 188 47,243
Private Placement Shares 1,300,000 13,000 1,249,739
Net Income
---------------- ---------------- -----------------
Balance at June 30, 2000 9,967,897 99,679 11,403,826
Exercise of Stock Options 134,180 1,342 62,574
Issuance of Stock - ESPP 89,296 893 86,469
Stock-based compensation 314,600
Net Income
---------------- ---------------- ----------------
Balance at June 30, 2001 10,191,373 101,914 11,867,469
Exercise of Stock Options 2,859,728 28,597 289,227
Issuance of Stock - ESPP 89,792 898 29,599
Stock-based compensation 6,678
Foreign currency adjustment
Net Loss
---------------- ---------------- ----------------
Balance at June 30, 2002 13,140,893 $ 131,409 $ 12,192,973
================ ================ ================
COMTEX NEWS NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE FISCAL YEARS ENDED
JUNE 30, 2002, 2001 AND 2000
Total
Accumulated Other Comprehensive Stockholders
Deficit Income/(Loss) Equity/(Deficit)
---------------- ------------------- -----------------
Balance at June 30, 1999 $(10,367,078) $ - $ (254,033)
Exercise of Stock Options 80,290
Issuance of Stock - ESPP 47,431
Private Placement Shares 1,262,739
Net Income 1,241,497 1,241,497
---------------- ------------------- ------------------
Balance at June 30, 2000 (9,125,581) - 2,377,924
Exercise of Stock Options 63,916
Issuance of Stock - ESPP 87,362
Stock-based compensation 314,600
Net Income 265,453 265,453
---------------- ------------------- -----------------
Balance at June 30, 2001 (8,860,128) - 3,109,255
Exercise of Stock Options 317,824
Issuance of Stock - ESPP 30,497
Stock-based compensation 6,678
Foreign currency adjustment (3,242) (3,242)
Net Loss (1,361,023) (1,361,023)
---------------- ------------------- -----------------
Balance at June 30, 2002 $(10,221,151) $ (3,242) $ 2,099,989
=============== =================== =================
The accompanying "Notes to Consolidated Financial Statements"
are an integral part of these consolidated financial statements
F-4
COMTEX NEWS NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
June 30,
-------------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
Cash Flows from Operating Activities:
Net (Loss)/Income $ (1,361,023) $ 265,453 $ 1,241,497
Adjustments to reconcile net (loss)/income
to net cash provided by operating activities:
Depreciation and Amortization Expense 1,114,158 773,672 243,075
Bad Debt Expense 412,497 823,850 225,500
Stock-based compensation 6,678 314,600 -
Loss on disposal of assets 416 8,859 166,238
Changes in Assets and Liabilities:
Accounts Receivable 420,195 (635,132) (971,864)
Prepaid Expenses and Other Current Assets 155,653 (181,420) (113,030)
Deposits and Other Assets (8,945) 18,176 (165,786)
Accounts Payable and Accrued Expenses 261,524 (140,448) 888,710
Deferred Revenue (228,462) 90,507 88,461
--------------- --------------- --------------
Net Cash provided by Operating Activities 772,691 1,338,117 1,602,801
Cash Flows from Investing Activities:
Purchases of Property and Equipment (583,113) (2,684,124) (1,395,772)
Proceeds from Disposal of Assets 813 - 2,450
--------------- --------------- -------------
Net Cash used in Investing Activities (582,300) (2,684,124) (1,393,322)
Cash Flows from Financing Activities:
Repayments on Note Payable - Affiliate (39,000) (93,000) (40,000)
Repayments - Capital Lease Obligation (2,201) - -
Proceeds from Issuance of Stock -
Private Placement - - 1,262,739
Proceeds from Issuance of Stock -
Employee Stock Purchase Plan 30,497 87,362 47,431
Proceeds from Exercise of Stock Options 317,824 63,916 80,290
--------------- --------------- -------------
Net Cash provided by Financing Activities 307,120 58,278 1,350,460
Effect of Exchange Rate Changes on Cash (4,456) - -
--------------- --------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents 493,055 (1,287,729) 1,559,939
Cash and Cash Equivalents at Beginning of Period 367,493 1,655,222 95,283
--------------- --------------- --------------
Cash and Cash Equivalents at End of Period $ 860,548 $ 367,493 $ 1,655,222
=============== =============== ==============
The accompanying "Notes to Consolidated Financial Statements"
are an integral part of these consolidated financial statement
F-5
COMTEX NEWS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002
1. THE COMPANY
COMTEX News Network, Inc. (the "Company" or "COMTEX") is
a leading business-to-business "infomediary" providing real-time
news content to business information retailers serving the
financial services, individual and institutional investor, wireless
and corporate information markets. COMTEX is headquartered in the
United States with a wholly owned subsidiary in Madrid, Spain. The
Company employs internally developed technology to aggregate and
process an average of 20,000 full news stories a day from over 70
content sources. The information is aggregated to create and
deliver real-time, subject-specific headline, summary and full
story news and information products. The Company's network of
distributors includes over one thousand information applications
and web sites that benefit from receiving up-to-the-minute
information delivered in an industry standard format, enhanced with
keywords, metadata, stock ticker symbols and organized by subject.
COMTEX's news products are read by millions of end-users.
Consistent with standard practice in the information
aggregation industry, the Company generally has renewable long-term
contractual relationships with those information providers and
information distributors with which it does business. These
information services contracts typically provide for both minimum
fees and royalties based upon expected and achieved volumes of
usage. Fees and royalties from information distributors comprise
the majority of the Company's revenues. Fees and royalties due to
information providers, along with telecommunications costs and
employee payroll costs, comprise the majority of the Company's
costs and expenses. The Company operates and reports in one
segment, information services.
AMASYS Corporation, ("AMASYS") (the successor corporation to
Infotechnology, Inc., "Infotech"), a Delaware corporation, legally
or beneficially controls 2,153,437 (approximately 16%) of the
issued and outstanding shares of the Company. In February 2002,
C.W. Gilluly, Ed.D., the Chairman of the Board of Directors of both
the Company and AMASYS, and his spouse, (the "Gillulys") exercised
an option to acquire 2,130,503 shares owned by AMASYS and exercised
an option to acquire an additional 2,192,503 shares. The Gillulys
legally or beneficially control 4,367,506 shares (approximately
33%) of the issued and outstanding shares of the Company and
directly own options to acquire an additional 100,000 shares of the
Company's common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
Comtex News Network, Inc. and its wholly owned subsidiary nFactory
Comtex, S.L. All significant intercompany transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with
maturity dates of 90 days or less at the time of purchase to be
cash equivalents.
Revenue Recognition
Information services revenues are recognized as services are
rendered based on contractual terms such as usage, fixed fee,
percentage of distributor revenues or other pricing models.
Effective April 1, 2001, the Company changed its method of
accounting for revenue recognition in accordance with Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
Statements. Previously, the Company recognized revenue for start-
up fees upon execution of a contract for content services. The
Company routinely completed implementation of its content feed to
the customer at the time of execution. The Company now defers start-
up fee revenues over the initial term of contracts for content
services. The cumulative effect of the change was not material to
the financial statements of the Company. Amounts received in
advance are deferred and recognized over the service period.
Foreign Currency Translation
The Company has designated the Euro as the functional currency
of its wholly-owned subsidiary in Spain. Accordingly, assets and
liabilities are translated from the Euro into U.S. dollars at the
end of period exchange rate, and revenues and expenses are
translated at average monthly exchange rates. Foreign currency
translation gains and losses are recorded in stockholders' equity
and reflected as a component of other comprehensive income or loss.
Total comprehensive loss for the year ended June 30, 2002 was
approximately $1,364,000.
Research and Development
The Company conducts ongoing research and development in the
areas of product enhancement and quality assurance. Such costs are
expensed as incurred. Costs for fiscal years 2002, 2001 and 2000
were approximately $363,000, $605,000 and $456,000, respectively.
Property and Equipment
Property and equipment are stated at cost. Maintenance and
repairs are charged to expense as incurred and the cost of renewals
and betterments are capitalized.
Depreciation and amortization are computed using the straight-
line method over the estimated lives of the related assets - five
years for furniture and fixtures, computer equipment and software
development and three years for purchased software. Leasehold
improvements are amortized using the straight-line method over the
lesser of the lease term or the estimated useful lives of the
related assets.
Upon retirement or sale, the cost and related accumulated
depreciation or amortization of assets is removed from the accounts
and any resulting gain or loss is included in the determination of
net income.
Software for Internal Use
The Company capitalizes certain costs incurred in the
development of internal use software pursuant to the provisions
of AICPA Statement of Position No. 98-1 (SOP 98-1) Accounting
for the Costs of Computer Software for Internal Use.
Capitalized costs consist of certain external direct costs of
third party software integrated into the Company's product,
development services performed by consultants and payroll costs
for employees who are directly associated with the development
process.
Income Taxes
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.
Stock Based Compensation
The Company grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of the
shares at the date of the grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees and, accordingly, recognizes no
compensation expense for the stock option grants under the Stock
Option Plan.
Risks and Uncertainties
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts
receivable. The Company periodically performs credit evaluations
of its customers' financial condition and generally does not
require collateral on accounts receivable. As of June 30, 2002 and
2001, none of the Company's customers accounted for 10% or more of
gross revenues. The Company maintains reserves on accounts
receivable and to date credit losses, in the aggregate, have not
exceeded management's expectations.
Earnings per Common Share
Basic earnings per share ("EPS") is calculated by dividing net
earnings available to common shares by weighted average common
shares outstanding. Diluted EPS is calculated similarly, except
that it includes the dilutive effect of the assumed exercise of
stock options.
Fair Value of Financial Instruments
Accounts receivable, accounts payable, accrued expenses and
other current assets and liabilities are carried at amounts which
reasonably approximate their fair values because of the relatively
short maturity of those instruments. It is not practical to
estimate the fair value of the Company's Long-term Note Payable to
Affiliate due to its unique nature.
Recent Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which addresses
the financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 supercedes SFAS No.
121 but retains SFAS No. 121's fundamental provisions for
recognition/measurement of impairment of long-lived assets to be
held and used, and measurement of long-lived assets to be disposed
of but retains the requirement to report discontinued operations
separately from continuing operations and extends that reporting
requirement to a component of an entity that either has been
disposed of or is classified as held for sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, and
for interim periods within these fiscal years. The Company does
not expect the impact of adopting SFAS No. 144 to be material.
In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other
Intangible Assets ("the Statements"), effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill
and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets
will continue to be amortized over their useful lives. The
Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of fiscal
2003. The Company does not expect the adoption of the Statements
to impact the earnings or financial position of the Company.
Reclassifications
Certain fiscal year 2001 and 2000 amounts have been
reclassified to conform to the fiscal year 2002 presentation.
3. RELATED PARTY TRANSACTIONS
Note Payable to AMASYS
During August 2001, AMASYS and COMTEX signed an amendment to
the Note Payable to AMASYS, (Second Amendment to Amended,
Consolidated and Restated 10% Senior Subordinated Secured Note)
(the "Amended Note") extending the due date of the note until July
1, 2008. In addition to the extension of the term, the Amended
Note includes a provision for AMASYS to convert all or a portion of
the outstanding principal amount, plus accrued interest, into
common stock of COMTEX. The Amended Note is convertible at a price
of $1.00 per share, which price increases by $0.10 upon each
anniversary of the amendment.
The Amended note bears interest at a rate of 10% on the principal
balance of $914,954 at June 30, 2002. Principal payments of
$39,000 were made during fiscal year 2002. The Note is
collateralized by a continuing interest in all receivables, all
products of such receivables and the proceeds thereof, all purchase
orders, and all patents and technology now or hereafter held or
received by the Company.
Approximately $93,000, $97,000 and $105,000 in interest was
paid to AMASYS during the fiscal years ended June 30, 2002, 2001
and 2000, respectively.
Stock Option Transfer
During fiscal years 2002 and 2001, the Gillulys transferred
238,500 and 242,000, respectively, of their stock options, which
were fully exercisable at $0.10 per share, to certain members of
management. This transfer resulted in compensation expense to the
Company of approximately $7,000 and $315,000 for fiscal years 2002
and 2001, respectively. The options were exercised in February
2002.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30:
2002 2001
---------------- ---------------
Computer Equipment $ 2,814,878 $ 2,656,134
Furniture and Fixtures 431,247 435,816
Software and Software Development 2,711,770 2,258,897
Leasehold Improvements 183,979 183,204
Other Equipment 14,064 14,064
---------------- ----------------
6,155,938 5,548,115
Less Accum. Depreciation & Amort. (2,910,912) (1,817,462)
---------------- ----------------
Net $ 3,245,026 $ 3,730,653
================= ================
Depreciation expense for the fiscal years ended June 30,
2002, 2001 and 2000 was $573,000 $432,000 and $136,000,
respectively. Amortization expense was $541,000, $342,000 and
$107,000 for the fiscal years ended June 30, 2002, 2001 and 2000,
respectively.
5. CAPITAL LEASE OBLIGATIONS AND LINE OF CREDIT
In May 2002, the Company entered into a $50,000, three-year
capital lease agreement with Compaq Financial Services to
purchase software and related maintenance. The lease calls for
monthly installments of $1,755 and expires in April 2005. The
leased software is capitalized using the interest rates
appropriate at the inception of the lease. The related software
is included in property and equipment and depreciated
accordingly. Future minimum lease payments under capital lease
obligations at June 30, 2002 are as follows:
Fiscal Year Ending June 30,
2003 $ 21,060
2004 21,060
2005 17,550
--------------------
59,670
Less amounts representing interest (11,871)
--------------------
Present value of net minimum payments 47,799
Less current portion (14,492)
--------------------
Long-term portion $ 33,307
====================
Approximately $2,700 in interest was paid to Compaq Financial
Services during the fiscal year ended June 30, 2002.
In June 2001, the Company obtained a $500,000 line of credit
with United Bank. The line of credit was collateralized by a
security interest in all inventory, chattel paper, accounts,
equipment and general intangibles. The line of credit bore
interest at the Prime Rate and expired June 29, 2002. The Company
did not utilize the line of credit.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share:
Fiscal Year Ended June 30,
2002 2001 2000
--------------- ------------ ------------
Numerator:
Net Income/(Loss) $ (1,361,023) $ 265,453 $ 1,241,497
================ ============ ============
Denominator:
Denominator for basic earnings per share -
weighted average shares 11,348,923 10,026,735 9,051,214
Effect of dilutive securities:
Stock Options - 3,942,355 3,617,831
---------------- ------------- ------------
Denominator for diluted earnings per share
11,348,923 13,969,090 12,669,045
================ ============ ============
Basic (Loss)/ Earnings Per Share $ (.12) $ .03 $ .14
Diluted (Loss)/ Earnings Per Share $ (.12) $ .02 $ .10
7. INCOME TAXES
Income taxes included in the Statements of Operations consist
principally of state income taxes and local franchise taxes. The
tax provision for continuing operations differs from the amounts
computed using the statutory federal income tax rate as follows:
2002 2001 2000
------ ------ -----
Provision at statutory federal 34% 34% 34%
income tax rate
Provision - state income tax 4 4 4
Change in valuation allowance (38) (38) (38)
------ ------ ------
Effective income tax rate 0% 0% 0%
====== ====== ======
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting and income tax purposes.
Significant components of the deferred tax assets and
liabilities were as follows:
As of June 30,
2002 2001
------------- ------------
Deferred tax assets:
Net operating loss carryforwards - operations $ 1,067,497 $ 608,771
Net operating loss carryforwards - NQSOs 173,138 144,484
Amortization 19,600 26,167
Allowance for bad debts 114,054 210,480
Options to executives 2,538 129,808
Accruals 339,959 59,776
Note receivable reserve 34,132 34,132
Alternative minimum tax credit carryforward 13,865 19,865
Other 456 4,887
------------- ------------
Total deferred tax assets 1,765,239 1,238,370
Deferred tax liabilities:
Depreciation (188,035) (137,070)
------------- ------------
Total deferred tax liabilities (188,035) (137,070)
------------- ------------
Deferred tax assets less liabilities 1,577,204 1,101,300
Less: Valuation allowance (1,577,204) (1,101,300)
------------- ------------
Net deferred tax asset (liability) $ - $ -
============= =============
The Company has net operating loss (NOL) and business tax
credit carryforwards available to offset future taxable income of
approximately $3,000,000 as of June 30, 2002. The net change in
valuation allowance during 2002 was an increase of approximately
$476,000. These NOL and the business tax credit carryforwards
expire beginning in the year 2003. Utilization of these net
operating losses may be subject to limitations in the event of
significant changes in stock ownership of the Company.
In assessing the realizability of its net deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the net deferred tax assets are realizable.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment. As of June 30, 2002, the
Company provided a full valuation allowance of approximately $1.6
million against its net deferred tax assets.
8. STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "1995 Plan")
provides for both incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, and
non-qualified stock options to purchase shares by key employees,
consultants and directors of the Company. The Company has
3,901,935 shares reserved for issuance under the 1995 Plan as of
June 30, 2002, subject to annual increases as determined by the
Board of Directors. The exercise price of an incentive stock
option is required to be at least equal to 100% of the fair market
value of the Company's common stock on the date of grant (110% of
the fair market value in the case of options granted to employees
who are 10% shareholders). The exercise price of a non-qualified
stock option is required to be not less than the par value, nor
greater than the fair market value, of a share of the Company's
common stock on the date of the grant. The term of an incentive or
non-qualified stock option may not exceed ten years (five years in
the case of an incentive stock option granted to a 10%
stockholder), and generally vest within three years of issuance.
Information with respect to stock options under the 1995 Plan
is as follows:
2002 2001 2000
------------------------------------------------------------------------
Shares Weighted Shares Weighted Shares Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Price Price Price
-------------- -------- ---------- --------- ----------- -----------
Outstanding at
beginning of year 1,964,090 $ 1.19 1,633,805 $ 0.84 1,767,583 $ 0.25
Granted 859,500 0.49 717,125 2.45 548,500 2.17
Exercised (329,725) 0.20 ( 134,180) 0.48 ( 514,147) 0.15
Expired/
Forfeited (527,688) 1.77 (252,660) 2.90 (168,131) 1.02
-------------- =========== ===========
Outstanding at
End of year 1,966,177 0.89 1,964,090 1.19 1,633,805 0.84
============== =========== ===========
Options
exercisable at
end of year 1,023,682 0.73 1,208,700 0.52 1,119,353 0.30
Weighted
average fair
value of options
granted $ 0.42 $ 1.98 $ 1.80
The following table summarizes information about the stock options outstanding
at June 30, 2002:
Outstanding Exercisable
- ------------------------------------------------------------- -------------------------------
Weighted-Average
Weighted- Remaining Weighted-
Number of Average Contractual Life Number of Average
Exercise Price Shares Exercise Price (years) Shares Exercise Price
- ------------------------------------------------------------- --------------------------------
$ 0.10-0.63 1,417,237 $ 0.34 7.04 769,937 $ 0.21
$ 0.86-1.84 209,150 $ 1.66 8.11 102,685 $ 1.64
$ 2.05-4.88 339,790 $ 2.71 8.08 151,060 $ 2.70
--------- ---------
1,966,177 1,023,682
========= =========
The Company has adopted the disclosure-only provisions of SFAS
No. 123. Had compensation cost for the Company's stock option plan
been determined based upon the fair value at the grant date for
awards under the plan consistent with the methodology prescribed
under SFAS No. 123, the Company's net (loss)/income in fiscal years
2002, 2001 and 2000 would have been approximately $(1,787,000),
$(45,000) and $1,052,000, or $(.16), $ .00 and $ .12 per share,
respectively.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing fair value model.
The following weighted-average assumptions were used for grants:
dividend yield of 0%; expected volatility of 1.10 to 1.23; expected
life of the option term of 5 years and risk-free interest rate of
4.09% to 4.82%.
9. EMPLOYEE STOCK PURCHASE PLAN
In December 1997, stockholders approved the 1997 Employee
Stock Purchase Plan. The purpose of the Plan is to secure for the
Company and its stockholders the benefits of the incentive inherent
in the ownership of Common Stock by present and future employees of
the Company. The Plan is intended to comply with the terms of
Section 423 of the Internal Revenue Code of 1986, as amended, and
Rule 16b-3 of the Securities Exchange Act of 1934. Under the terms
of the Plan individual employees may pay up to $10,000 for the
purchase of the Company's common shares at 85% of the determined
market price.
10. SUPPLEMENTARY INFORMATION
Income Statement
The following income statement items were charged to costs and expenses:
Fiscal Year Ended June 30,
2002 2001 2000
---------------- -------------------- -------------------
Maintenance and Repairs $ 103,105 $ 150,878 $ 96,685
Advertising and Promotion
Costs 60,076 369,522 241,437
Royalties 3,724,109 4,257,494 3,205,744
Allowance for Doubtful Accounts
The following table summarizes activity in the
allowance for doubtful accounts:
Fiscal Year Ended June 30,
--------------------------
2002 2001 2000
---------- ----------- ------------
Beginning Balance $ 553,896 $ 314,331 $ 350,868
Additions - charged to operating expenses 412,497 823,850 225,500
Write-Offs (666,250) (584,285) (262,037)
---------- ----------- ------------
Balance at End of Year $ 300,143 $ 553,896 $ 314,331
========== =========== ============
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancelable operating
leases that expire beginning December 31, 2002. The leases require
fixed escalations and payment of property taxes, insurance and
maintenance costs.
The future minimum rental commitments under operating leases
are as follows:
Fiscal year ending Minimum Rental
June 30, Commitments
- ------------------- ------------------
2003 $ 591,718
2004 495,583
2005 484,019
2006 498,540
2007 513,496
2008 and beyond 617,493
------------------
$ 3,200,849
==================
Rent expense under all operating leases totaled approximately
$595,000, $554,000 and $278,000 for the fiscal years ended June 30,
2002, 2001 and 2000, respectively.
On July 17, 2001, the Company filed a breach of contract
action against Infospace, Inc., a former customer, in the United
States District Court for the Eastern District of Virginia for
payments owed under contracts with the defendant corporation. The
suit is captioned COMTEX News Network, Inc. v. Infospace, Inc.
Case Number CV01-1108-A. On August 13, 2001, Infospace filed an
Answer and Counterclaim alleging that COMTEX breached its agreement
and sought damages for lost business, loss of reputation and good
will.
On March 11, 2002, the court rendered a directed verdict in
favor of Infospace on the breach of contract claim and Infospace
withdrew the counterclaim without prejudice. Infospace also filed
a petition with the court for reimbursement of attorneys' fees and
costs.
On April 9, 2002, COMTEX filed a Notice of Appeal to reverse
the lower court decision. The case is now fully briefed before the
United States Court of Appeals for the Fourth Circuit and the
Company expects a ruling sometime in early 2003.
While the appeal was pending, the court, on August 13, 2002,
issued an order awarding attorneys' fees of approximately $393,000
to Infospace with costs still to be determined. COMTEX intends to
seek a stay of this award pending a ruling on the appeal. If
COMTEX prevails on the appeal, the award of attorneys' fees would
likely be reversed. Infospace also has petitioned the court to
require COMTEX to reimburse Infospace for approximately $201,000 in
costs. This petition is still pending before the court. COMTEX has
recorded an accrual in the year ended June 30, 2002 to provide for
the estimated exposure upon resolution of this matter.
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 the Comapany's financial condition.
12. 401(K) PLAN
The Company has a 401(k) plan available to all full-time
employees who meet a minimum service requirement. Employee
contributions are voluntary and are determined on an individual
basis with a maximum annual amount equal to the maximum amount
allowable under federal tax regulations. All participants are
fully vested in their contributions. The 401(k) plan provides for
discretionary Company contributions. The Company did not make any
contributions during the fiscal years ended June 30, 2002, 2001 and
2000.
13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of
operations for the years ended June 30, 2002 and 2001.
Quarter Ended:
---------------------------------------------------------------------
September 30, 2001 December 31, 2001 March 31, 2002 June 30, 2002
------------------ ----------------- -------------- -------------
Revenues $ 3,464,051 $ 3,197,808 $ 2,901,678 $ 2,684,157
Gross Profit 2,385,852 2,199,018 1,900,515 1,703,920
Net Income/(Loss) 69,397 2,967 (483,670) (949,717)
Net Income/(Loss) per share, basic $ 0.01 $ 0.0003 $ ( 0.04) $ (0.07)
Shares used in per share
calculation, basic 10,198,846 10,445,149 11,659,409 13,092,290
Net Income/(Loss) per share,
diluted $ 0.01 $ 0.0002 $ (0.04) $ (0.07)
Shares used in per share
calculation, diluted 12,994,747 12,924,521 11,659,409 13,092,290
Quarter Ended:
-------------------------------------------------------------------------
September 30, 2000 December 31, 2000 March 31, 2001 June 30, 2001
-------------------------------------------------------------------------
Revenues $ 4,161,097 $ 4,324,648 $ 4,306,391 $ 3,805,382
Gross Profit 3,000,876 3,168,716 3,134,803 2,615,178
Net Income 173,191 112,388 70,179 (90,305)
Net Income per share basic $ 0.02 $ 0.01 $ 0.01 $ (0.01)
Shares used in per share
caluculation, basic 9,968,150 9,982,881 10,062,307 10,093,602
Net Income per share, diluted $ 0.01 $ 0.01 $ 0.01 $ (0.01)
Shares used in per share
calculation, diluted 13,785,500 13,814,914 14,062,685 14,213,260