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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, 2003; 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)
Delaware 13-3055012
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4900 Seminary Road, Suite 800, 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
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act. Yes No X
As of September 22, 2003, 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 $3,259,897.
As of September 22, 2003, 13,582,903 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, 2003.
PART I
This section should be read in conjunction with the consolidated
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," "continue to," "intend," "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
Comtex is a leading wholesaler of electronic real-time news and
content to major financial and business information distributors.
We enhance and standardize news and other content received from
more than 65 newswire services and publishers in order to provide
editorially superior and technically uniform products to our
customers. Our customers then package, integrate and distribute
our products to their end-users. We process more than 25,000
unique real-time news stories each day. For each news story,
processing includes, adding stock ticker symbols, indexing by
keyword and category, and converting the diverse publisher
materials and formats received into XML, the industry standard
delivery format.
Toward the end of fiscal year 2003, Comtex commenced a thorough
evaluation of our market position, product line, pricing and
technology strategies as part of an overall revitalization of the
Company. The evaluation has resulted in changes to many areas of
the Company, as described below.
Market Positioning
In the early 1990's, prior to the predominance of the Internet,
Comtex was one of the market originators of electronic real-time
news. At that time, our client focus was on financial
information services, corporate enterprise solution vendors and
online consumer services. With the growth of the Internet, we
expanded our client base to include consumer and individual
investor sites. A vital element of our growth was the
distinctive value we added to real-time, public company news by
adding stock ticker symbols and filtering the news into specific
categories.
The demand for news and content distribution paralleled the
tremendous growth of the Internet during the late 1990's.
Similarly, the subsequent collapse of Internet-related businesses
has resulted in business consolidation and failures, the decline
of individual investor web sites, and the erosion of royalties
from corporate solution providers. Given these market
conditions, it has become increasingly important for Comtex to
clearly define our role and value to our suppliers and customers.
As depicted in the following chart, we have positioned ourselves
as a wholesaler, providing sales and marketing support to our
distributor customers. Moreover, we have a strong reputation of
adding value to the publishers' products that we license to
distributors, and providing our publisher-partners with
incremental revenue and exposure to new markets.
Graphic chart entitled "Market Positioning." This chart
illustrates the flow of news and content from publishers to
Comtex, and then to distributors, and finally to end-users.
Specifically, the flow starts with "Publishers," the
Suppliers who create news and content products; into Comtex,
who as "Wholesaler," adds keywords and stock ticker symbols,
and repackages with other news and content; then to
"Customers," the Distributors who take specialized Comtex
news feeds and integrate them into products to view and
search news; ending up with "Retail End-Users," who consume
the news and content via Internet or proprietary distributor
interface.
The primary goal of Comtex's sales and marketing function is to
support our distributor customers and enhance their sales. We
accomplish this goal by supplying products at competitive prices
that our distributor customers need and providing cooperative
sales and marketing support to those customers, including joint
sales calls and lead generation. Our 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 Lines
The three product lines produced and distributed by Comtex are:
(1) CustomWires - subject-specific newswires compiled from
national and international news bureaus, agencies and
publications. Presented in a variety of subject combinations,
including energy, finance, international and public company
information, CustomWires enable distributors to receive news
relevant to their target markets;
(2) Comtex TopNews (formerly Newsroom) -editorially selected
top news stories of the day. A broad range of news story
options, including financial markets, vertical markets, general
market and world news; and
(3) Publisher Full Feeds - delivery from a specific publisher
that provides distributors with the complete content offering
from that publisher.
To avoid the potential for conflict with our distributors, Comtex
has discontinued products that could be perceived as competitive
to our distributors' products. Two such products which are no
longer available via Comtex are News Solutions, a suite of
browser-based news applications that customers could integrate
into their web site, intranet or extranet, and The Ping, a real-
time news alerting application that delivered breaking news and
critical stories. Both of these products had been marketed
directly to end-users.
Comtex has streamlined and repackaged our CustomWire products in
response to distributor customer feedback. We will continue to
support the legacy CustomWire products for our distributors
through the term of their current contracts. The following
descriptions detail our new core CustomWire offerings:
Finance News
Insight into the major economic, corporate and legislative
activities that influence market movement. Includes
comprehensive coverage of a variety of topics, including up-to-
the-minute trading data from the major global stock markets,
commodities and futures prices, personal investment news,
economic indicator data, international trade policies, general
business news, IRS bulletins, and actions from the major global
financial institutions. Company-specific stories include stock
tickers. (Formerly known as Wall Street, Business and Finance).
International
Local reporting from over 150 countries covering the major
political, social, economic and financial issues that impact
countries outside the United States. Includes information on a
variety of topics including international elections, foreign
policy, military actions, environment news, health issues,
international business, trade and financial market activity.
Features content from over 500 international news agencies,
bureaus, and publications and provides global and regional
perspectives. Regional coverage includes Africa, Asia/Pacific,
Canada, China, Commonwealth of Independent States Countries,
Eastern and Western Europe, Latin America and the Mideast.
(Formerly known as International and Regional wires).
Public Companies
Press releases and news stories about companies that are publicly
traded on United States and Canadian exchanges. Features
corporate announcements on such topics as stock splits,
technological discoveries, quarterly earnings, and new marketing
initiatives. In addition to comprehensive news sources, Public
Companies includes content from the world's largest and most
prolific press release services. All stories include company
stock tickers. (Formerly known as Public Companies and Public
Companies Canada).
Energy
Focus on news from energy corporations, committees, and
regulatory organizations around the world. Includes in-depth
news on all sectors of the energy industry, including nuclear,
coal, natural gas, petroleum, and alternative power. Stories
about international trade deals, worldwide production, usage and
regulatory issues, awarded contracts, business acquisitions and
investments, environmental incidents, energy exploration
projects, pipeline constructions, international energy disputes,
and financial summaries on the industry's impact on the world's
economies.
Environment
Breaking news on the activities and events that affect the
world's ecosystems and environments. Features coverage of
Environmental Protection Agency policy changes, alternative
energy developments, Weather Service announcements, and pollution
and toxic waste alerts. Also includes coverage of the
environmental lobby, natural resource conservation, recycling
efforts, wildlife and ecological preservation, and pollution
management control.
Equity Analysis
News reports, analysis, commentary, and competitive business and
financial information related to publicly traded companies.
Includes coverage of companies under the scrutiny of the SEC,
mergers and acquisitions, technical analysis and other
information related to equities. Contributing sources are
publishers of high value, analytical content of importance to
investors. All stories include company stock tickers.
Government
Insight into legislative, judicial, and executive branch
activities of the United States government that impact our world.
Includes coverage of presidential activities, legislative
activities, foreign policy issues, national defense, election
coverage and Supreme Court rulings.
Comtex's publishers, newswire services and other content partners
supply the information that is the foundation of our product
offerings. Each of our suppliers generally offers a unique
editorial perspective and area of coverage that we integrate with
other suppliers' content to create our products. Our licensing
procedures address content suppliers' concerns about unauthorized
distribution and publishing. These publishers receive royalties
in most cases based upon their content's contribution to our
products and the corresponding revenues generated from our
customers. In some cases, we are required to pay monthly minimum
guarantees for the rights to license the content. Therefore, our
distributors receive the benefit of our upfront capital
investment and, in turn, also pay us monthly minimums as
described below (see "Pricing Strategies".)
Comtex's United States based publisher/suppliers include:
o The Associated Press
o Briefing.com
o Business Wire
o Christian Science Monitor
o Dow Jones News Service
o EDGAR Online
o Knight-Ridder/Tribune Business News
o Knobias.com
o OsterDowJones
o PBI Media
o PR Newswire
o Thomson Financial/Nelsons Broker Summaries
o United Press International
o Vickers Stock Research Corporation
International publisher/suppliers include:
o AllAfrica, Inc.
o Asia Pulse
o Australasian Business Intelligence Abstracts (ABIX)
o AFX News
o Business News Americas, Ltda.
o ComputerWire
o Datamonitor
o EFE News Service
o Europa Press Internet
o Global Information Network
o Liquid Africa
o South American Business Information
o Xinhua News Agency
Pricing Strategies
In order to improve business transaction processing with Comtex,
a price list with official and consistent product pricing
recently has been introduced for new customers. This new price
list will be introduced to existing customers upon the next
renewal of their agreements. Furthermore, in addition to
continuing to offer the Company's classic real-time news and
content products, "near real-time" products (delayed by up to 30
minutes) are being introduced at varying price points.
Comtex offers three basic product-pricing modules:
(1) Primary License - Distributor's primary website where
customers can view news and content for free (open site) or for a
fee (subscription);
(2) Co-Brands - End-users that license websites from
distributors with Comtex news bundled; and
(3) Trading Platform - Per end-user "seat" pricing, primarily
for investment firms and/or professional traders.
In order to create attractive and fair pricing for large
customers under the above Primary License and Co-Brand pricing
structures, Comtex is offering volume discounts to distributors
that agree to guaranteed monthly minimum payments. The
customer's level of usage under its Primary License determines
its pricing for Co-Brands. To utilize the Co-Brand module, the
customer first must purchase a Primary License. Under the Trading
Platform module, volume discounts are also available with payment
of monthly guarantees. Initial setup, training and product
integration fees vary as a function of volume. Product support
and communication fees are charged at 10% of monthly fees.
Product support and communication fees include access to Comtex's
client services and publishing staff, as well as communications
support.
Contract terms with our distributors generally range from one to
three years. One customer contributed approximately 10.1% of our
annual revenues during fiscal year 2003.
Comtex's distributor/customer base includes:
o Bloomberg
o CBS Marketwatch
o Charles Schwab & Co./Cybertrader
o Dialog
o Factiva
o ILX
o Lexis Nexis
o Multex
o NewsEdge
o Pinnacor
o S&P Comstock
o Sungard
o Thomson
o Track Data
o Zacks Investment Research
Technology
Comtex uses a proprietary real-time content processing system
designed to process and enhance real-time data. As electronic
submissions of news and information are received from our
suppliers, our system 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 to each public company mentioned in a story.
These metadata enhance the functionality of filters that sort our
stories into CustomWires and allow our distributors to accurately
and efficiently redirect content to their products and ultimately
to their end-users.
Technology infrastructure investments, which started in fiscal
2002, were continued in fiscal 2003. These included additional
hardware and software development, both of which have continued
to improve the reliability of our systems.
As available technology is developed, we continue to evaluate and
adopt new approaches to improve reliability, decrease costs and
deliver increasingly complex products using simpler
methodologies.
Product Development
Product development activities include quality assurance, content
product enhancements and the development of proprietary news
products. For the years ended June 30, 2003, 2002 and 2001 our
product development costs were approximately $272,000, $363,000
and $605,000, respectively. Expenses related to the design and
development of our content processing systems are not included in
these costs. In fiscal years 2003 and 2002, the decrease in
costs resulted primarily from a reduction in personnel. We
intend to pursue future product development in partnership with
our publisher/suppliers and distributor/customers.
Competition
Our competition includes integrators and distributors of news and
related content, national and international electronic news and
information services, and traditional content providers seeking
direct relationships with distributors. We differentiate
ourselves from much of our competition by the diversity of
content, technology solutions, pricing models offered and other
"one stop shop" advantages.
Employees
At September 22, 2003, we had approximately 21 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 room at 450 Fifth Street, NW,
Washington, D.C. 20549. 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 website
at http://www.sec.gov, or via the Investor Relations page
maintained at the Comtex website, http://www.comtex.com.
Item 2. Properties
We own no real estate. We lease office space at 4900 Seminary
Road in Alexandria, Virginia. We currently lease approximately
17,000 square feet at an annual rental expense of approximately
$467,000, with said agreement expiring in August 2008. The lease
agreement on an additional approximately 7,000 square feet
expired in August 2003. In addition, our subsidiary, nFactory
Comtex, S.L., leased shared space in Madrid, Spain at a cost of
approximately $1,700 per month. This lease expired in December
2002.
Item 3. Legal Proceedings
On July 17, 2001, we filed a breach of contract action against
Infospace, Inc. ("Infospace"), a former customer, in the United
States District Court for the Eastern District of Virginia for
payments owed to us 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 was fully briefed before the
United States Court of Appeals for the Fourth Circuit.
On August 13, 2002 the Court issued an order awarding attorneys'
fees of approximately $393,000 to Infospace, with costs to be
determined. Infospace also petitioned the Court to require the
Company to reimburse Infospace for approximately $201,000 in
costs. The Company recorded an accrual at June 30, 2002, to
provide for the estimated exposure upon resolution of this
matter.
On December 10, 2002, Comtex and Infospace entered into an
agreement settling the pending litigation between them, resulting
in a payment of $200,000 to Infospace. Pursuant to this
agreement, the parties entered into mutual releases and each
party denied liability to the other party. Based on this
settlement, the Company reversed $394,000 in accrued costs at
June 30, 2002 as a reduction in general and administrative
expenses in the consolidated statement of operations for the
fiscal year ended June 30, 2003.
In July 2003, the Company commenced negotiations with its
landlord regarding the proposed termination of the lease
obligation at 4900 Seminary Road. As part of the negotiations
the landlord filed suit on September 3, 2003 in Alexandria
General District Court in the Commonwealth of Virginia for
approximately $92,000 in unpaid rent and late fees through
September 30, 2003. Negotiations are still underway and the
outcome is currently indeterminate.
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 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 2002 and 2003 is shown below:
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
Fiscal Year Ended June 30, 2003 High Low
First Quarter
(7/1 to 9/30/02) 0.29 0.13
Second Quarter
(10/1 to 12/31/02) 0.21 0.10
Third Quarter
(1/1 to 3/31/03) 0.21 0.15
Fourth Quarter
(4/1 to 6/30/03) 0.28 0.12
The approximate number of holders of record of our Common
Stock as of September 22, 2003 was 576.
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)
2003 2002 2001 2000 1999
--------- -------- -------- ------- ----------
Total Revenues $ 9,268 $ 12,248 $ 16,598 $ 12,645 $ 7,557
Operating (Loss)/Income $ (1,211) $(1,277) $ 310 $ 1,308 $ 542
Net (Loss)/Income $ (1,337) $(1,361) $ 265 $ 1,241 $ 456
Basic Net (Loss)/Income Per Share $ (0.10) $ (0.12) $ 0.03 $ 0.14 $ 0.06
Shares Used in Per Share Calculation, 13,184 11,349 10,027 9,051 7,984
Basic
Diluted Net (Loss)/Income Per Share $ (0.10) $ (0.12) $ 0.02 $ 0.10 $ 0.04
Shares Used in Per Share Calculation, 13,184 11,349 13,969 12,669 11,344
Diluted
Balance Sheet Data at Year End:
Total Assets $ 3,473 $ 5,600 $ 6,565 $ 5,977 $ 2,408
Long-term Note and Lease Obligations $ 880 $ 948 $ 954 $ 987 $ 1,047
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
We generate revenues primarily from charges to distributors for the
licensing of enhanced content, including CustomWires, TopNews
products and publishers' full feeds. Distributor licenses typically
consist of minimum royalty commitments and fixed fees for
communication and support. Royalties are based upon our customers'
business and revenue models such that success in their chosen
markets generates increasing revenues for us.
We are currently based in the United States. A wholly owned
subsidiary in Madrid, Spain was formed in the fall of 2001, to
expand our operations throughout Europe; however, due to negative
cash flow from these operations and the lack of sales in Europe, the
subsidiary was shut down in December 2002.
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 (royalties and fixed fees) 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 of service performance are
deferred and recognized over the service period. Certain royalty
revenues are estimated based on prior usage reports and adjusted
accordingly, based on reporting received from customers.
Restructuring Activities
Due to the negative cash flow from the Spain operations and the lack
of sales projected from the European market, the Company terminated
the operations of nFactory Comtex, S.L. as of December 31, 2002.
The Company has transitioned the customer accounts to U.S. account
representatives. The subsidiary will remain incorporated for future
operations should market opportunities warrant. The termination
benefits associated with the shutdown of this wholly owned
subsidiary were approximately $44,000, including the termination of
all three employees in the Madrid office. The costs other than
termination benefits consisted of approximately $13,000 in other
expense related to the disposal of assets and approximately $7,000
in foreign currency losses. These amounts are included in technical
operations and support, sales and marketing, and other expense for
the fiscal year ended June 30, 2003. All amounts have been paid as
of the fiscal year end.
In October 2002, Comtex vacated leased premises of approximately
7,000 square feet and consolidated employees in the remaining
premises. The Company recorded a charge of approximately $126,000
in October 2002, which represented the Company's remaining lease
obligation, offset by any rental income, and was recorded in general
and administrative expenses in the consolidated statement of
operations. Approximately $10,000 is accrued as of June 30, 2003
and will be paid in the first quarter of the fiscal year ending June
30, 2004.
During the fiscal year ended June 30, 2003, the Company implemented
reductions in workforce impacting approximately 15 employees.
Severance expense of approximately $88,000 in the aggregate was
recorded and is reflected in technical operations and support,
product development, sales and marketing and general and
administrative expenses in the consolidated statement of operations.
Approximately $33,500 of this amount is accrued as of June 30, 2003
and will be paid in fiscal year 2004.
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.
During the fiscal year ended June 30, 2003, the Company determined
that two asset groups were impaired and the Company recorded an
impairment charge of approximately $499,000 in the consolidated
statement of operations. Discounted future operating cash flows
were used in estimating the fair value of the asset groups.
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, 2003 to the Fiscal Year
ended June 30, 2002
Revenues consist primarily of royalty revenues and fees from the
licensing of content products to information distributors. During
the year ended June 30, 2003, our total revenues were approximately
$9,268,000, a decrease of approximately $2,979,000, or 24%, from
total revenues of approximately $12,248,000 for the year ended June
30, 2002. One customer contributed approximately 10.1% of the total
revenues for the fiscal year ended June 30, 2003. No one customer
accounted for more than 10% of our revenues in the prior fiscal
year. The decline in revenues is the direct result of business
closures and consolidation among customers, primarily in the
Internet and personal investor markets.
Our cost of revenues consists primarily of content licensing fees
and royalties to content providers, depreciation expense on our
production software, and data communication costs for the delivery
of our products to customers. The cost of revenues for the year
ended June 30, 2003 was approximately $3,887,000, a decrease of
approximately $587,000, or 13%, from the cost of revenues for the
year ended June 30, 2002. The decrease in cost is primarily due to
the decrease in content royalties, approximately $560,000, as a
result of decreased revenues for the period, as well as savings in
the cost of data communications to receive and distribute content of
approximately $73,000. 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
decrease was partially offset by an increase in depreciation expense
of approximately $46,000.
The gross profit for the year ended June 30, 2003 was approximately
$5,381,000, a decrease of approximately $2,393,000, or 31%, from the
prior year. The gross margin percentage declined for the year
ended June 30, 2003, to approximately 58% from approximately 63% 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, 2003 were
approximately $6,592,000, a decrease of approximately $2,458,000, or
27%, from the operating expenses for the year ended June 30, 2002.
The decrease in operating expenses resulted from decreases in
technical operations and support, product development, sales and
marketing, and general and administrative expenses, partially offset
by an increase in depreciation and amortization expense and the
impairment charge related to the disposal of software.
Technical operations and support expenses during the year ended June
30, 2003 decreased approximately $500,000, or 22%, from these
expenses in the year ended June 30, 2002. This decrease resulted
from a decrease in personnel and computer related expenses.
Product development expenses decreased approximately $91,000, or
25%, for the year ended June 30, 2003 compared to the year ended
June 30, 2002. 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 approximately $450,000, or
31%, for the year ended June 30, 2003 compared to the year ended
June 30, 2002. This decrease is the result of a reduction in
personnel and sales commission expense as a result of the decrease
in revenues.
General and administrative expenses for the year ended June 30, 2003
were approximately $1,965,000, or 46%, less than these expenses
during the year ended June 30, 2002. This decrease in expenses
resulted from the recovery of approximately $394,000 in accrued
costs at June 30, 2002 in settlement of the Infospace lawsuit, as
well as reduced legal (approximately $362,000) and accounting costs
(approximately $72,000) related to the case. In addition, the
decrease is the result of reductions in consulting costs related to
business development opportunities of approximately $317,000, and a
reduction in bad debt expense of approximately $359,000 due to more
successful collection efforts and reduced revenues.
Stock-based compensation of approximately $2,000 for the year ended
June 30, 2003 represents options granted to a consultant for
services rendered during the period. In connection with the
transfer of stock options from a member of the Board of Directors to
certain employees, we recorded stock-based compensation of
approximately $7,000 during the year ended June 30, 2002.
An impairment charge of approximately $499,000 was recorded to
reflect the write-off of the carrying value of assets related to our
hosting service, News Solutions, and other software, which were
determined to be impaired as of June 30, 2003. No such impairment
was recorded in the prior fiscal year.
Depreciation and amortization expenses not included in the cost of
revenues for the year ended June 30, 2003 were approximately
$54,000, or 8%, higher than these expenses during the prior year.
The increase was due to additional capital expenditures related to
increasing the capacity and redundancy of the production systems
over the past twelve months.
Net interest expense increased approximately $12,000, or 14%, due to
interest on capital leases, partially offset by a decrease in
interest resulting from principal payments made on the Amasys note.
Other expense, net of other income, increased approximately $29,000
primarily due to the disposal of assets and the shutdown of
nFactory.
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
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, depreciation expense on our
production software, and data communication costs for the delivery
of our products to customers. The cost of revenues for the year
ended June 30, 2002 was approximately $4,474,000, a decrease of
approximately $488,000, or 10%, 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 (approximately $533,000) as a
result of decreased revenues for the period, savings in the data
communications costs to distribute content to our customers of
approximately $86,000, and partially offset by an increase in
depreciation expense of approximately $131,000. 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
$7,774,000, a decrease of approximately $3,861,000, or 33%, over the
prior year. The gross margin percentage declined for the year
ended June 30, 2002, to approximately 63% from approximately 70% 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 $9,051,000, a decrease of approximately $2,274,000, or
20%, 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 the accrual of $594,000 for the estimated exposure
related to the Infospace litigation, 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 a member 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 $209,000, or 43%, higher than these expenses
during the prior year. The increase was due primarily to the
deployment of upgraded 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 2003, we incurred an operating loss of
approximately $1,211,000 and a net loss of approximately $1,337,000.
At June 30, 2003, we had a working capital deficit of approximately
$399,000 as compared with a deficit of approximately $478,000 at
June 30, 2002. The increase in working capital was due primarily to
the recovery of approximately $394,000 in accrued expenses at June
30, 2002 related to the settlement of the Infospace lawsuit. The
increase was partially offset by the use of funds for capital
expenditures and payments on our long-term debt. We had
stockholders' equity of approximately $786,000 at June 30, 2003, as
compared to stockholders' equity at June 30, 2002, of approximately
$2,100,000. The decrease in stockholders' equity was due primarily
to the net loss incurred during the fiscal year ended June 30, 2003.
For the year ended June 30, 2003, our operating activities utilized
approximately $32,000 in cash. We had cash of approximately
$465,000 at June 30, 2003, compared to approximately $861,000 at
June 30, 2002.
We made capital expenditures of approximately $288,000 in the year
ended June 30, 2003, primarily for software licensing and the
development of software for internal use, compared to $583,000 for
the same period ended June 30, 2002. These investments improve our
product capabilities, reliability and our ability to meet future
content and client processing requirements.
In September 2002, we obtained a two-year financing agreement for
$76,000 to purchase software and related maintenance with HP
Financial Services that expires August 2004. Financing activities
during the year ended June 30, 2003 utilized approximately $85,000
in cash.
During the six months ended December 31, 2002, nFactory Comtex,
S.L., the Company's wholly owned subsidiary in Madrid, Spain,
incurred expenses of approximately $141,000 with minimal revenue
generated. Due to the negative cash flow from these operations and
the lack of sales projected from the European market, the Company
terminated the operations of nFactory Comtex as of December 31,
2002. The Company has transitioned the customer accounts to U.S.
account representatives. The subsidiary will remain incorporated
for future operations should market opportunities warrant. The
financial statements included with this annual report present the
consolidated financial results of Comtex and its subsidiary.
Currently we are dependent on our cash reserves to fund operations,
however we incurred net losses for the years ended June 30, 2002 and
2003 and our revenue base has been declining. Assuming stability in
the financial and corporate markets - our primary markets, we
believe continuing control of operating expenses and a focus on
revenue generation in both our existing customer base and potential
new markets will generate positive operating cash flows to meet our
obligations on a short-term basis. Our ability to meet our
liquidity needs on a long-term basis depends on our ability to
generate sufficient revenues and cash to cover our current and long-
term 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 short-term or long-
term liquidity needs.
In April 2003, we entered into a separation agreement with the
former President and CEO of the Company. The terms of the agreement
require even payments over approximately ten months in an amount
equal to his final monthly gross salary in exchange for short-term
consulting, a one year non-compete agreement, waiver of his existing
employment agreement which required seven months of continuing
salary, and waiver of his right to a lump-sum bonus payment that
equaled approximately three and one-half months salary.
In July 2003, we entered into a separation and consulting agreement
with the successor President and CEO of the Company. The terms of
the agreement require payments of an hourly rate over approximately
90 days in exchange for short-term consulting.
EBITDA, as defined below, increased approximately 423% to a profit
of approximately $504,000 for the year ended June 30, 2003 compared
to a loss of $156,000 for fiscal year 2002. The increase is primarily
the result of the recovery of accrued costs related to the Infospace
lawsuit settlement as well as decreased operating expenses, excluding
stock-based compensation, depreciation and amortization. The increase
was partially offset by a decline in revenues and a decrease in gross
profit margin. The table below shows the reconciliation from net
(loss)/income to EBITDA.
Fiscal Year Ended June 30,
2003 2002 2001
---------------------------------
(in thousands)
Reconciliation to EBITDA:
Net (Loss)/Income $ (1,337) $ (1,361) $ 265
Stock-based compensation 2 7 314
Depreciation and Amortization 1,215 1,114 774
Impairment Charge 499 - -
Interest/Other Expense 125 84 43
Income Taxes - - 2
---------------------------------
EBITDA $ 504 $ (156) $ 1,398
EBITDA consists of earnings before interest and other expense,
interest and other income, income taxes, stock-based compensation,
depreciation and amortization and impairment charges. 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 Are Dependent On Our Cash Reserves And Have Experienced A
Declining Cash Balance
Currently we are dependent on our cash reserves to fund operations;
however, we have incurred net losses for the years ended June 30,
2002 and 2003 and our revenue base has been declining. 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 long-term obligations. 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 short-term or long-term liquidity needs.
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 effect 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, which 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.
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, 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, could damage our reputation, and impact 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 service 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 therefore are 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 2003, the closing prices
of our Common Stock ranged from $0.11 to $0.44. 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 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 adverse affect on earnings due to amortizing any intangible
assets acquired
o issuance of new equity securities that dilute the holdings of
existing stockholders
o 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 ceased with the shutdown of our foreign
subsidiary. The impact of currency exchange rate movements as of
June 30, 2003 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 14,
which is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) at the end of
the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that,
as of the end of the period covered by this report, our disclosure
controls and procedures are effective to ensure that information
required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934, is recorded,
processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. There has been no change in
the Company's internal control over financial reporting during the
Company's fourth quarter of fiscal year 2003 that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART III
The information required by Items 10, 11, 12 and 13 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
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) 1. Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets at June 30,
2003 and 2002 F-2
Consolidated Statements of Operations
for the fiscal years ended June 30,
2003, 2002, and 2001 F-3
Consolidated Statements of Stockholders' Equity
for the fiscal years ended June 30, 2003,
2002 and 2001 F-4
Consolidated Statements of Cash Flows
for the fiscal years ended June 30,
2003, 2002 and 2001 F-5
Notes to Consolidated 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
On April 25, 2003 the Company filed a report on Form
8-K announcing certain management changes.
On May 15, 2003 the Company filed a report on Form 8-
K disclosing financial results for the third quarter
of fiscal year 2003.
(c) Exhibits
3.1 Certificate of Incorporation of the Company,
(incorporated by reference to the Company's Form 8-K
dated December 31, 2002).
3.2 By-Laws of the Company (incorporated by
reference to the Company's Form 8-K dated December 31,
2002).
10.1 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).
10.2 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).
10.3 Comtex Scientific Corporation 1995 Stock
Option Plan (incorporated by reference to the Company's
Proxy Statement dated November 9, 1995).
10.4 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).
10.5 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 the
Company's Form 10-K dated June 30, 1999).
10.6 First Amendment to Comtex Scientific
Corporation 1995 Stock Option Plan, effective September
15, 1997, dated February 7, 2000 (incorporated by
reference to the Company's Form 10-K dated June 30,
2001).
10.7 Second Amendment to Comtex Scientific
Corporation 1995 Stock Option Plan, effective December
2, 1999, dated February 7, 2000 (incorporated by
reference to the Company's Form 10-K dated June 30,
2001).
10.8 Third Amendment to Comtex News Network, Inc.
1995 Stock Option Plan, effective December 7, 2000,
dated June 1, 2001 (incorporated by reference to the
Company's Form 10-K dated June 30, 2001).
10.9 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 the Company's
Form 10-K dated June 30, 2001).
10.10 Comtex News Network, Inc. 1997 Employee Stock
Purchase Plan, as Amended and Restated, effective as of
December 5, 2002 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q dated December
31, 2002).
10.11 Comtex News Network, Inc. 1995 Stock Option
Plan, as Amended and Restated, effective as of January
1, 2003 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q dated December 31, 2002).
10.12 Separation Agreement and Release with Charles W.
Terry, effective April 24, 2003 (incorporated by
reference to the Company's Quarterly Report on Form 10-
Q dated May 15, 2003).
10.13 Employment Agreement with Raymond P. Capece,
effective April 25, 2003 (incorporated by reference to
the Company's Quarterly Report on Form 10-Q dated May
15, 2003).
10.14 Employment Agreement with Stephen W. Ellis
effective July 1, 2003 (incorporated by reference to
the Company's Form 8-K dated August 18, 2003).
10.15 Employment Agreement with Laurence F. Schwartz
effective July 1, 2003 (incorporated by reference to
the Company's Form 8-K dated August 18, 2003).
10.16 Comtex News Network, Inc. 2003 Incentive Stock
Plan (incorporated by reference to the Company's Form 8-
K dated August 18, 2003).
10.17 Separation Agreement and Release with Raymond P.
Capece dated July 22, 2003.
10.18 Separation Agreement and Release with C.W.
Gilluly dated June 12, 2003.
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
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(d) Not Applicable
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 25, 2003
COMTEX NEWS NETWORK, INC.
By: /s/ Stephen W. Ellis By: /s/ Robin Y. Deal
Stephen W. Ellis Robin Y. Deal
Chairman & Chief Vice President, Finance &
Executive 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/ Stephen W. Ellis Chairman September 25, 2003
Stephen W. Ellis and Chief Executive
Officer
/s/ C.W. Gilluly, Ed. Director September 25, 2003
C.W. Gilluly, Ed.D.
/s/ Erik Hendricks Director September 25, 2003
Erik Hendricks
/s/ Robert J. Lynch, Jr. Director September 25, 2003
Robert J. Lynch, Jr.
/s/ William J. Howard Director September 25, 2003
William J. Howard
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, 2003 and 2002 and the
related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended June
30, 2003. 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Comtex News Network, Inc. at June 30, 2003 and 2002, and
the consolidated results of its operations and its cash flows for
each of the three years in the period ended June 30, 2003, in
conformity with accounting principles generally accepted in the
United States.
The accompanying financial statements have been prepared assuming
that Comtex News Network, Inc. will continue as a going concern. As
more fully described in Note 2, the Company has incurred recurring
operating losses and has a working capital deficiency. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do
not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome
of this uncertainty.
/s/Ernst & Young LLP
McLean, Virginia
September 5, 2003
COMTEX NEWS NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
2003 2002
------------------------ -------------------------
ASSETS
CURRENT ASSETS
Cash $ 464,981 $ 860,548
Accounts Receivable, Net of Allowance of
$140,500 and $300,143, at June 30, 2003
and 2002, respectively 779,136 1,071,717
Prepaid Expenses and Other Current Assets 86,787 141,673
------------------------ -------------------------
TOTAL CURRENT ASSETS 1,330,904 2,073,938
PROPERTY AND EQUIPMENT, NET 2,067,149 3,445,026
DEPOSITS AND OTHER ASSETS 74,988 80,747
------------------------ -------------------------
TOTAL ASSETS $ 3,473,041 $ 5,599,711
======================== =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Expenses $ 1,081,671 $ 1,991,087
Accrued Payroll Expenses 463,699 442,895
Deferred Revenue 127,634 102,987
Capital Lease Obligations, Current 56,625 14,492
------------------------ -------------------------
TOTAL CURRENT LIABILITIES 1,729,629 2,551,461
LONG-TERM LIABILITIES:
Capital Lease Obligations, Long-Term 23,483 33,307
Long-Term Note Payable - Affiliate 856,954 914,954
Deferred Rent 77,353 -
------------------------ -------------------------
TOTAL LONG-TERM LIABILITIES 957,790 948,261
------------------------ -------------------------
TOTAL LIABILITIES 2,687,419 3,499,722
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY
Common Stock, $0.01 Par Value - 25,000,000
Shares Authorized; Shares issued
and outstanding: 13,245,170 and 13,140,893
at June 30, 2003 and 2002, respectively 132,452 131,409
Additional Paid-In Capital 12,211,181 12,192,973
Accumulated Deficit (11,558,011) (10,221,151)
Accumulated Other Comprehensive Loss - (3,242)
------------------------ -------------------------
TOTAL STOCKHOLDERS' EQUITY 785,622 2,099,989
------------------------ -------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,473,041 $ 5,599,711
======================== =========================
The accompanying "Notes to Consolidated Financial Statements" are an integral
part of these consolidated financial statements.
COMTEX NEWS NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended
June 30,
2003 2002 2001
------------ ----------- -----------
Revenues
$ 9,268,404 $ 12,247,694 $ 16,597,518
Cost of Revenues
(including depreciation and
amortization expense of
approximately $462,000, $416,000
and $284,000 for the fiscal
years ended June 30, 2003, 2002
and 2001, respectively) 3,887,168 4,473,895 4,962,280
------------ ----------- -----------
Gross Profit 5,381,236 7,773,799 11,635,238
Operating Expenses
Technical Operations and Support 1,729,733 2,230,210 3,242,673
Product Development 272,417 363,185 605,433
Sales and Marketing 1,004,578 1,454,981 2,710,316
General and Administrative 2,332,340 4,296,970 3,962,681
Stock-based Compensation 2,100 6,678 314,600
Impairment Charge 498,645 - -
Depreciation and Amortization 752,673 698,652 489,337
------------ ----------- -----------
Total Operating Expenses 6,592,486 9,050,676 11,325,040
Operating (Loss)/Income (1,211,250) (1,276,877) 310,198
Other (Expense)/Income
Interest (Expense), net (97,260) (85,334) (33,783)
Other (Expense)/Income (27,859) 1,614 (8,859)
------------- ----------- -----------
Other (Expense), net (125,119) (83,720) (42,642)
------------- ----------- -----------
(Loss)/Income Before Income Taxes (1,336,369) (1,360,597) 267,556
Income Tax Expense 491 425 2,103
------------- ----------- -----------
Net (Loss)/Income $(1,336,860) $(1,361,022) $ 265,453
============= ============ ===========
Basic (Loss)/Income Per Common Share $ (0.10) $ (0.12) $ 0.03
============= ============ ===========
Weighted Average Number of Common Shares 13,184,219 11,348,923 10,026,735
============= ============ ===========
Diluted (Loss)/Income Per Common Share $ (0.10) $ (0.12) $ 0.02
============= ============ ===========
Weighted Average Number of
Shares Assuming Dilution 13,184,219 11,348,923 13,969,090
============= ============ ===========
The accompanying "Notes to Consolidated Financial Statements" are an integral
part of these consolidated financial statements
COMTEX NEWS NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED
JUNE 30, 2003, 2002 AND 2001
Common Shares Outstanding
---------------------------
Accumulated Total
Number of Par Additional Accumulated Other Comprehensive Stockholders'
Shares Value Paid-In Capital Deficit Income/(Loss) Equity
----------- --------- --------------- -------------- ------------------- ------------
Balance at June 30, 2000 9,967,897 $ 99,679 $ 11,403,826 $ (9,125,581) - $ 2,377,924
Exercise of Stock Options 134,180 1,342 62,574 63,916
Issuance of Stock - ESPP 89,296 893 86,469 87,362
Stock-based Compensation 314,600 314,600
Net Income 265,453 265,453
----------- --------- --------------- -------------- ------------------- ------------
Balance at June 30, 2001 10,191,373 $ 101,914 $ 11,867,469 $ (8,860,128) $ - 3,109,255
=========== ========= =============== ============== =================== ============
Exercise of Stock Options 2,859,728 28,597 289,227 317,824
Issuance of Stock - ESPP 89,792 898 29,599 30,497
Stock-based Compensation 6,678 6,678
Foreign Currency Translation
Adjustment (3,242) (3,242)
Net Loss (1,361,023) (1,361,023)
----------- --------- --------------- -------------- ------------------- ------------
Balance at June 30, 2002 13,140,893 $ 131,409 $ 12,192,973 $ (10,221,151) $ (3,242) 2,099,989
=========== ========= =============== ============== =================== ============
Issuance of Stock - ESPP 104,277 1,043 16,108 17,151
Stock-based Compensation 2,100 2,100
Foreign Currency Translation
Adjustment 3,242 3,242
Net Loss (1,336,860) (1,336,860)
----------- --------- --------------- -------------- ------------------- ------------
Balance at June 30, 2003 13,245,170 $ 132,452 $ 12,211,181 $ (11,558,011) $ - $ 785,622
=========== ========= =============== ============== =================== ============
The accompanying "Notes to Consolidated Financial Statements" are an integral
part of these consolidated financial statements.
COMTEX NEWS NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
June 30,
----------------------------------------------
2003 2002 2001
----------------------------------------------
Cash Flows from Operating Activities:
Net (Loss)/Income $ (1,336,860) $ (1,361,023) $ 265,453
Adjustments to reconcile net (loss)/income to net cash
(used in)/provided by operating activities:
Depreciation and Amortization Expense 1,214,582 1,114,158 773,672
Bad Debt Expense 53,472 412,497 823,850
Stock Based Compensation 2,100 6,678 314,600
Loss on Disposal of Assets 19,945 416 8,859
Property and equipment impairment charge 498,645 - -
Foreign currency loss 7,349 - -
Changes in Assets and Liabilities:
Accounts Receivable 239,109 420,195 (635,132)
Prepaid Expenses and Other Current Assets 50,818 155,653 (181,420)
Deposits and Other Assets 5,759 (8,945) 18,176
Accounts Payable and Other Accrued Expenses (909,814) 231,665 307,939
Accrued Payroll Expenses 20,804 29,859 (448,387)
Deferred Revenue 24,647 (228,462) 90,507
Deferred Rent 77,353 - -
----------------------------------------------
Net Cash (Used in)/Provided by Operating Activities (32,091) 772,691 1,338,117
Cash Flows from Investing Activities:
Purchases of Property and Equipment (287,514) (583,113) (2,684,124)
Proceeds from Disposal of Assets 8,564 813 -
----------------------------------------------
Net Cash Used in Investing Activities (278,950) (582,300) (2,684,124)
Cash Flows from Financing Activities:
Repayments on Note Payable - Affiliate (58,000) (39,000) (93,000)
Repayments of Capital Lease Obligations (43,677) (2,201) -
Issuance of Stock under Employee Stock Purchase Plan 17,151 30,497 87,362
Proceeds from Exercise of Stock Options - 317,824 63,916
----------------------------------------------
Net Cash (Used in)/Provided by Financing Activities (84,526) 307,120 58,278
----------------------------------------------
Effect of Exchange Rate Changes on Cash - (4,456) -
----------------------------------------------
Net (Decrease)/Increase in Cash (395,567) 493,055 (1,287,729)
----------------------------------------------
Cash at Beginning of Period 860,548 367,493 1,655,222
----------------------------------------------
Cash at End of Period $ 464,981 $ 860,548 $ 367,493
==============================================
The accompanying "Notes to Consolidated Financial Statements" are
an integral part of these consolidated financial statements
COMTEX NEWS NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
1. THE COMPANY
Comtex News Network, Inc. (the "Company" or "Comtex"), based in the
United States, is a leading wholesaler of electronic real-time news
and content to major financial and business information
distributors. Comtex enhances and standardizes news and other
content received from more than 65 newswire services and publishers
in order to provide editorially superior and technically uniform
products to its customers. The customers then package, integrate
and distribute these products to their end-users. Comtex processes
more than 25,000 unique real-time news stories each day. For each
news story, processing includes adding stock ticker symbols,
indexing by keyword and category, and converting the diverse
publisher materials and formats received into XML, the industry
standard delivery format.
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. The Company generates
revenues primarily from charges to distributors for the licensing
of enhanced content, including CustomWires, TopNews products and
publishers' full feeds. Distributor licenses typically consist of
minimum royalty commitments and fixed fees for data communications
and support. Royalties are based upon our customers' business and
revenue models such that success in their chosen markets generates
increasing revenues for the Company. 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 at that time, 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 from the Company.
2. GOING CONCERN
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the
accompanying consolidated financial statements, the Company has
incurred recurring net losses for the years ended June 30, 2002 and
2003 and a significant decline in its revenue base. In addition,
the Company has a working capital deficit of approximately $399,000
at June 30, 2003. The future operation of the Company is dependent
upon its ability to generate positive cash flows from operations to
cover its current and long-term obligations.
During the year ended June 30, 2003, management implemented cost
reductions and plans to continue to reduce operating expenses, by
implementing a lower cost technology infrastructure and reducing
headcount. Additionally, management intends to renew its
commitment to a wholesaler marketing model and incent customers to
higher usage levels through a revised pricing structure. No
assurance may be given that Comtex will be able to maintain the
revenue base or the size of profitable operations that may be
necessary to continue as a going concern.
The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
3. 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. ("nFactory"). All significant intercompany
transactions have been eliminated in consolidation. nFactory is no
longer active.
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.
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 and recognizes revenue 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 were accumulated in stockholders'
equity and reflected as a component of other comprehensive income
or loss. Due to the termination of nFactory's operations on
December 31, 2002, the foreign currency translation adjustment
balance was removed from stockholders' equity and reported as a
loss in the consolidated statement of operations. Total
comprehensive loss for the years ended June 30, 2003 and 2002 was
approximately $1,334,000 and $1,364,000, respectively.
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. Product development costs for the fiscal
years ended June 30, 2003, 2002 and 2001 were approximately
$272,000, $363,000 and $605,000, respectively.
Advertising
The Company engages in advertising and promotional activities to
promote its products and services. Advertising costs are expensed
as incurred. Advertising costs were approximately $16,000,
$60,000 and $370,000 for the fiscal years ended June 30, 2003, 2002
and 2001, 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, which includes the amortization of
assets under capital leases, 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.
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. In
accordance with SOP 98-1, the Company capitalizes internal
software development costs incurred during the application
development stage. Software development costs incurred prior to
or subsequent to the application development stage are expensed
as incurred.
Impairment of Long-Lived Assets
The Company evaluates, on a quarterly basis, long-lived assets
to be held and used, including capitalized software, for
impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The evaluation is
based 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, then an estimate of the undiscounted value
of expected future operating cash flows is used to determine
whether the asset is recoverable and the amount of any
impairment is measured 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.
During fiscal year 2003, the Company determined that two asset
groups were impaired and the Company recorded an impairment
charge of approximately $499,000 in the consolidated statement
of operations. Discounted future operating cash flows were used
in estimating the fair value of the asset groups.
Income Taxes
The Company accounts for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Under this method, deferred
tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in
which the differences are expected to reverse. Deferred tax assets
are reduced by a valuation allowance when the Company cannot make
the determination that it is more likely than not that some portion
or all of the related tax asset will be realized.
Stock-based Compensation
SFAS No. 123 (SFAS 123), Accounting for Stock-Based Compensation,
requires that companies either recognize compensation expense for
grants of stock options and other equity instruments based on fair
value, or provide pro forma disclosure of net income (loss) and
net income (loss) per share in the notes to the financial
statements. At June 30, 2003, the Company has a stock-based
compensation plan, which is described more fully in Note 10. The
Company accounts for this plan under the recognition and
measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no compensation cost has been
recognized under SFAS 123 for the Company's employee stock option
plan. Had compensation cost for the awards under the plan been
determined based on the grant date fair values, consistent with
the method required under SFAS 123, the Company's net
(loss)/income and net (loss)/income per share would have
increased/decreased to the pro forma amounts indicated below:
Fiscal Year Ended June 30,
2003 2002 2001
--------------- ------------- ------------
Net (Loss)/Income, as reported $ (1,336,860) $ (1,361,023) $ 265,453
Deduct: Stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 147,123 425,977 310,469
--------------- -------------- -------------
Pro Forma Net (Loss) $ (1,483,983) $ (1,787,000) $ (45,016)
=============== ============== =============
Basic (Loss)/Income Per Share, as reported $ (0.10) $ (0.12) $ 0.03
Diluted (Loss)/Income Per Share, as reported $ (0.10) $ (0.12) $ 0.02
Basic (Loss) Per Share, pro forma $ (0.11) $ (0.16) $ (0.00)
Diluted (Loss) Per Share, pro forma $ (0.11) $ (0.16) $ (0.00)
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
Fiscal Year Ended June 30,
2003 2002 2001
-------------- ------------- -------------
Risk free rate of interest 3.25% to 4.82% 4.09% to 4.82% 4.82% to 6.22%
Expected dividend yield 0% 0% 0%
Expected life in years 5 5 5
Expected Voatility 1.10 to 1.23 1.10 to 1.23 1.10 to 1.56
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. For the fiscal year
ended June 30, 2003, one of the Company's customers accounted for
approximately 10.1% of gross revenues. No individual customer
accounted for 10% or more of gross revenues for the fiscal years
ended June 30, 2002 or 2001. The Company maintains reserves on
accounts receivable and, to date, credit losses have not exceeded
management's expectations.
Earnings per Common Share
Basic earnings per share ("EPS") is calculated by dividing net
income/(loss) by the weighted average common shares outstanding.
Diluted EPS is calculated similarly, except that it includes the
assumed exercise of stock options as long as the effect is not anti-
dilutive.
Fair Value of Financial Instruments
Accounts receivable, accounts payable and other 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 June 2002, the Financial Accounting Standards Board ("FASB")
issued Statements of Financial Accounting Standards No. 146 (SFAS
146), Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs in a Restructuring). SFAS 146
specifies that a liability for a cost associated with an exit or
disposal activity is incurred when the definition of a liability in
Concepts Statement 6, Elements of Financial Statements, is met. The
provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. The Company implemented SFAS 146 in October
2002 related to the termination of nFactory's operations, as
discussed in Note 7.
In December 2002, the FASB issued SFAS No. 148 (SFAS 148),
Accounting for Stock-Based Compensation-Transition and Disclosure,
which amends SFAS 123. SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the
disclosure requirements of SFAS 123 to require disclosures in both
the annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of
the method used on reported results. The Company will continue to
account for its employee stock option plans in accordance with APB
25 and related interpretations, which results in no charge to
earnings when options are issued at fair market value. Therefore,
at this time, the Company has adopted the disclosure rules of SFAS
No. 148 and does not expect that this statement will have a
material impact on its financial statements.
Reclassifications
Certain fiscal year 2002 and 2001 amounts have been reclassified to
conform to the fiscal year 2003 presentation.
4. RELATED PARTY TRANSACTIONS
Note Payable to Amasys
In 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 approximately $857,000 and $915,000 at June 30, 2003 and
2002, respectively. The Amended 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. The outstanding principal balance of the Amended Note is
due at maturity.
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. Of these transferred options, 337,500 were exercised
in February 2002.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30:
2003 2002
-------------- --------------
Computer Equipment $ 2,023,357 $ 2,814,878
Furniture and Fixtures 386,792 431,247
Purchased Software and Software Development 2,571,137 2,911,770
Leasehold Improvements 197,421 183,979
Other Equipment 8,064 14,064
-------------- --------------
5,186,771 6,355,938
Less Accumulated Depreciation and Amortization (3,119,622) (2,910,912)
-------------- --------------
Property and Equipment, Net $ 2,067,149 $ 3,445,026
============== ==============
6. CAPITAL LEASE OBLIGATIONS
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. In September 2002, the
Company obtained a two-year financing agreement for $76,000 to
purchase software and related maintenance with HP Financial
Services that expires August 2004. The lease calls for monthly
installments of $3,634. The leased software is capitalized using
the interest rates appropriate at the inception of the lease.
Assets held under capital leases are reported as property and
equipment as follows:
June 30,
2003 2002
--------- --------
Purchased software $121,487 $ 45,500
Accumulated depreciation 38,802 2,528
Future minimum lease payments under capital lease obligations at
June 30, 2003 are as follows:
Fiscal Year Ending June 30,
2004 $ 64,668
2005 24,818
------------
89,486
Less amounts representing interest (9,378)
------------
Present value of net minimum payments 80,108
Less current portion (56,625)
------------
Long-term portion $ 23,483
============
7. RESTRUCTURING ACTIVITIES
The Company recorded termination benefits associated with the
shutdown of nFactory of approximately $44,000 including the
termination of all three employees in the Madrid office. The costs
other than termination benefits consisted of approximately $13,000
related to the disposal of assets and approximately $7,000 in
foreign currency loss. These amounts are included in technical
operations and support, sales and marketing and other expense in
the consolidated statement of operations for the fiscal year ended
June 30, 2003. All amounts have been paid as of the fiscal year
end.
Further, in October 2002, Comtex vacated leased premises of
approximately 7,000 square feet and consolidated employees into the
remaining premises. The Company recorded a charge of approximately
$126,000 in October 2002, which represented the Company's remaining
lease obligation offset by any rental income. This amount was
recorded in general and administrative expenses in the consolidated
statement of operations. Approximately $10,000 of this amount is
accrued as of June 30, 2003 and will be paid in the first quarter
of fiscal year 2004.
During the fiscal year ended June 30, 2003, the Company implemented
reductions in workforce impacting approximately 15 employees.
Severance expense of approximately $88,000 in the aggregate was
recorded and is reflected in technical operations and support,
product development, sales and marketing and general and
administrative expenses in the consolidated statement of
operations. Approximately $33,500 of this amount is accrued as of
June 30, 2003 and will be paid in fiscal year 2004.
8. EARNINGS PER COMMON SHARE
The following table sets forth the computation of
basic and diluted earnings per common share:
Fiscal Year Ended June 30,
2003 2002 2001
-------------- ------------- ------------
Numerator:
Net (loss)/income $ (1,336,860) $ (1,361,023) $ 265,453
=============== ============= ============
Denominator:
Denominator for basic (loss)/income per
share - weighted average shares 13,184,219 11,348,923 10,026,735
Effect of dilutive securities:
Stock options - - 3,942,355
-------------- ------------- ------------
Denominator for diluted (loss)/income per
share 13,184,219 11,348,923 13,969,090
=============== ============= ============
Basic (loss)/income per common share $ (.10) $ (.12) $ .03
Diluted (loss)/income per common share $ (.10) $ (.12) $ .02
9. 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 differ from the amounts computed using the statutory federal income
tax rate as follows:
2003 2002 2001
------ ------ -----
Provision at statutory federal income tax rate (34%) (34%) 34%
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,
2003 2002
----------- -----------
Deferred tax assets:
Amortization 18,156 19,600
Net operating loss carryforwards 1,535,436 1,240,635
Allowance for bad debts 53,390 114,054
Options to executives 3,336 2,538
Accruals 205,469 339,959
Note receivable reserve - 34,132
Alternative minimum tax credit carryforward - 13,865
Other 1,254 456
----------- -----------
Total deferred tax assets 1,817,041 1,765,239
Deferred tax liabilities:
Depreciation / Amortization (183,135) (188,035)
----------- -----------
Total deferred tax liabilities (183,135) (183,035)
----------- -----------
Deferred tax assets less liabilities 1,633,907 1,577,204
Less: Valuation allowance (1,633,907) (1,577,204)
----------- -----------
Net deferred tax asset (liability) $ - $ -
========= ===========
The Company has net operating loss (NOL) carryforwards available to
offset future taxable income of approximately $4,040,000 as of June
30, 2003. The net change in valuation allowance during 2003 was an
increase of approximately $57,000. The NOL carryforwards expire
beginning in the year 2004 through 2023. 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, 2003, the
Company provided a full valuation allowance of approximately
$1,634,000 against its net deferred tax assets as the recovery of
these assets is not reasonably assured.
10. 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 4,550,000 shares
reserved for issuance under the 1995 Plan as of June 30, 2003,
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:
2003 2002 2001
-------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------
Outstanding at
beginning of year 1,966,177 $ 0.89 1,964,090 $ 1.19 1,633,805 $ 0.84
Granted 1,686,200 0.16 859,500 0.49 717,125 2.45
Exercised - - (329,725) 0.20 (134,180) 0.48
Expired/
Forfeited (779,519) 1.00 (527,688) 1.77 (252,660) 2.90
---------- --------- ---------
Outstanding at
end of year 2,872,858 0.43 1,966,177 0.89 1,964,090 1.19
========== ========= ==========
Options
exercisable at
end of year 1,916,013 0.50 1,023,682 0.73 1,208,700 0.52
Weighted
average fair
value of options
granted $ 0.13 $ 0.42 $ 1.98
The following table summarizes information about the stock
options outstanding at June 30, 2003:
Outstanding Exercisable
- ------------------------------------------------ --------------------
Weighted-
Weighted- Average Weighted-
Number of Average Remaining Number of Average
Exercise Price Shares Exercise Contractual Shares Exercise
Price Life (years) Price
- -------------------------------------------------------------------------
$ 0.10-0.63 2,554,198 $ 0.18 6.82 1,647,713 $ 0.21
$ 0.86-1.81 127,660 $ 1.64 5.95 93,960 $ 1.68
$ 2.05-4.88 191,000 $ 2.56 4.04 174,340 $ 2.52
--------- ---------
2,872,858 1,916,013
========= =========
11. EMPLOYEE STOCK PURCHASE PLAN
In December 1997, stockholders approved the 1997 Employee Stock
Purchase Plan. The Company has 600,000 shares reserved for
issuance under the Plan as of June 30, 2003. 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 per calendar year for the purchase of the
Company's common shares at 85% of the determined market price.
12. SUPPLEMENTARY INFORMATION
Interest
The Company made payments for interest of $102,000, $96,000 and
$103,000 for the fiscal years ended June 30, 2003, 2002 and 2001,
respectively.
Allowance for Doubtful Accounts
The following table summarizes activity in the allowance for doubtful
accounts:
Fiscal Year Ended June 30,
2003 2002 2001
---------- --------- ----------
Beginning Balance $ 300,143 $ 553,896 $ 314,331
Additions - charged to operating expenses 53,472 412,497 823,850
Write-Offs (213,115) (666,250) (584,285)
---------- ---------- ----------
Balance at End of Year $ 140,500 $ 300,143 $ 553,896
========== ========== ==========
13. COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancelable operating
leases that expire August 31, 2003 and August 31, 2008. 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 Minimum Rental
ending June 30, Commitments
- --------------- ---------------
2004 $ 490,145
2005 484,019
2006 498,540
2007 513,496
2008 528,911
2009 and beyond 88,582
---------------
$ 2,603,693
===============
Rent expense under all operating leases totaled approximately
$649,000, $595,000 and $554,000 for the fiscal years ended June 30,
2003, 2002 and 2001, respectively.
On July 17, 2001, the Company filed a breach of contract action
against Infospace, Inc. ("Infospace"), 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 was fully briefed before the United
States Court of Appeals for the Fourth Circuit.
On August 13, 2002 the Court issued an order awarding attorneys'
fees of approximately $393,000 to Infospace, with costs to be
determined. Infospace also petitioned the Court to require the
Company to reimburse Infospace for approximately $201,000 in costs.
The Company recorded an accrual at June 30, 2002, to provide for
the estimated exposure upon resolution of this matter.
On December 10, 2002, Comtex and Infospace entered into an
agreement settling the pending litigation between them, resulting
in a payment of $200,000 to Infospace. Pursuant to this agreement,
the parties entered into mutual releases and each party denied
liability to the other party. Based on this settlement, the
Company reversed $394,000 in accrued costs at June 30, 2002 as a
reduction in general and administrative expenses in the
consolidated statement of operations for the fiscal year ended June
30, 2003.
In July 2003, the Company commenced negotiations with its landlord
regarding termination of the lease obligation at 4900 Seminary
Road. As part of the negotiations the landlord filed suit in Alexandria
General District Court for approximately $92,000 in unpaid rent and
late fees through September 30, 2003. Negotiations are still
underway and the outcome is currently indeterminate.
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 Company's financial
condition.
14. 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, 2003, 2002 and 2001.
15. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
During the fourth quarter of fiscal 2003, the Company identified an
adjustment that resulted in a restatement of previously issued
quarterly financial statements for the fiscal year ended June 30,
2003. The adjustment related to the abandonment of office space in
the quarter ended December 31, 2002, as discussed in Note 7. The
following is a summary of previously reported quarterly financial
information restated to reflect the adjustment:
Quarter Ended:
-----------------------------------------------------
September December 31, March 31, June 30,
30, 2002 2002 2003 2003
-----------------------------------------------------
Revenues $ 2,431,498 $ 2,430,124 $ 2,287,394 $ 2,119,388
Gross Profit 1,444,465 1,443,406 1,309,958 1,183,407
Net Income/(Loss), as reported (267,473) 271,991 (168,032) (1,116,955)
Adjustment for lease liability (89,726) 33,335
Net Income/(Loss), restated 182,265 ( 134,697)
Net Income/(Loss) per share,
basic, as reported $ (0.02) $ 0.02 $ ( 0.01) $ (0.08)
Adjustment for lease liability $ (0.01) $ ( 0.00)
Net Income/(Loss) per share,
basic, restated $ 0.01 $ ( 0.01)
Net Income/(Loss) per share,
diluted, as reported $ (0.02) $ 0.02 $ (0.01) $ (0.08)
Adjustment for lease liability $ (0.01) $ ( 0.00)
Net Income/(Loss) per share,
diluted, restated $ 0.01 $ ( 0.01)
Quarter Ended:
-----------------------------------------------------
September December 31, March 31, June 30,
30, 2001 2001 2002 2002
-----------------------------------------------------
Revenues $ 3,464,051 $ 3,197,808 $ 2,901,678 $ 2,684,157
Gross Profit 2,281,975 2,095,141 1,796,638 1,600,045
Net Income/(Loss) 69,397 2,967 (483,670) (949,717)
Net Income/(Loss) per share basic $ 0.01 $ 0.00 $ (0.04) $ (0.07)
Net Income/(Loss) per share, diluted $ 0.01 $ 0.00 $ (0.04) $ (0.07)