10-K405/A 1 c10ka.txt INCORPORATE ITEMS 10, 11, 12 AND 13 OF PART III UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-K/A (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, 2001; or ___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-10541 COMTEX NEWS NETWORK, INC. (Exact name of registrant as specified in its charter) New York 13-3055012 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4900 Seminary Road, Suite 600, Alexandria, Virginia 22311 (Address of principal executive office) Registrant's telephone number, including area code: (703) 820-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X As of September 21, 2001, 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 $2,831,000. As of September 21, 2001, 10,191,373 shares of the Common Stock of the Registrant were outstanding. EXPLANATORY NOTE This amendment to the Annual Report for the fiscal year ended June 30, 2001 of COMTEX News Network (the "Company") is being filed by the Company to incorporate Items 10, 11, 12 and 13 of Part III. PART I This section should be read in conjunction with the financial statements and notes thereto included elsewhere in this annual report on Form 10-K. Except for the historical information contained herein, the matters discussed in this 10-K include forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. These forward- looking statements may be identified by reference to a future period or by use of forward-looking terminology such as "anticipate," "expect," "could," "may" or other words of a similar nature. Forward-looking statements, which we believe to be reasonable and are made in good faith, are subject to certain risks and uncertainties, including, but not limited to, those set forth under "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS." These risks could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on our behalf. Item 1. Business Overview We are a leading business-to-business "infomediary" providing real-time news content to business information retailers serving the financial services, individual and institutional investor, wireless and corporate information markets. We employ internally developed technology to aggregate and process an average of 20,000 full news stories a day from over 70 content sources. We aggregate the information to create and deliver real-time, subject-specific headline, summary and full story news and information products. Our network of distributors includes over one thousand web sites and corporate information applications that benefit from receiving up-to-the- minute information delivered in an industry standard format, enhanced with keywords, metadata, stock ticker symbols and organized by subject. Our news products are read by millions of end-users. Our Partners Distributors. Our distributor partners utilize our content products to provide their end-users with relevant, timely and comprehensive coverage. Our content products, tailored to our distributors' specifications and market requirements, contribute to the success of their business models. Our distributor partners also gain cost advantages by using us as a single source provider. The integration of aggregated content into our distributors' sites and services requires the management of only one contract in one technical format. Licensing content by topical or geographical area is also more cost effective for distributors since they pay only for specific content that impacts their target audience. Contract terms with our distributors generally range from one to three years. Our revenues are generated through various models including fixed fee, monthly royalty minimums and variable royalties based on the growth and success of the distributor's business model. Revenues are also derived from data communication charges for the delivery of our products to distributors. COMTEX offers a variety of delivery options including the Internet through file transfer protocol (FTP), as well as through various high speed technologies including virtual private networks (VPN), leased line, frame relay and satellite/FM. Some of our current distributors include: o Big Charts o Bloomberg o CBS Marketwatch o Dialog o Factiva o OneSource o S&P Comstock o Zacks Investment Research We added 176 new distributors during the 2001 fiscal year. However, more than 150 existing distributors terminated their contracts with us over the same period. A large number of these distributors terminated as a result of their lack of funding and/or bankruptcies. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Financial Condition, Liquidity and Capital Resources." No individual distributor provides more than 10% of our revenue. Content Providers. Our content providers supply us with the information that is the foundation of our product offerings. Each of our content providers generally offer a single editorial perspective or area of coverage, which we aggregate with other content providers to create a real-time, value-added feed, formatted for our distributors. This content includes: o Late-breaking domestic and international economic and political news; o Financial news; o Business news and company information; and o Sports and entertainment news. Through our network of distributors, our content providers reach millions of end-users -- gaining rapid access to new markets, new and increased revenue streams and brand exposure. Our content providers are able to significantly expand their reach, while our distributors avoid the work and expense of aggregating content in diverse formats from multiple sources. Further, our licensing procedures address content providers' concerns over unauthorized distribution and publishing. Our royalty model is highly attractive to our content providers since it is based on their contribution to our products and, unlike traditional models, generates royalties regardless of end-user utilization. Contract terms with our content providers generally range from one to three years and include the non-exclusive right to license content to re-sellers and other information distributors. This negotiated right is a significant asset since it allows us to generate revenue based on the end-user reach and business models of each of our distributor partners. In addition, it allows us to leverage the distributors' marketing expenditures and product investments. Costs associated with these licenses include fixed fees, monthly minimums and/or royalties paid to content providers based on our information services revenue. Some of our current providers include The Associated Press, Business Wire, EDGAR Online, Knight-Ridder, PBI Media Inc., PR Newswire and United Press International. We also have agreements with a significant number of internationally based news agencies including AllAfrica, Inc., Asia Pulse, Business News Americas, Ltda., New World Publishing and Xinhua. During fiscal year 2001, we added content from approximately 30 new content providers, bringing the total number of our content providers to over 70. Some of the content provided by these new providers includes information related to Securities and Exchange Commission filings, as well as general news and business information in French and Spanish. Technology During the 2000 fiscal year and the beginning of the 2001 fiscal year, we implemented a new real-time content processing system designed to more efficiently process and enhance more than 100,000 stories per day. Utilizing our experience in managing and processing real-time news feeds, we have designed various processes to improve the quality, reliability, packaging and ultimately the usability of our content. The method for processing and converting the real-time news feeds into content products relies on our computer technology and data management software. As electronic submissions of news and information are received, our computers convert each story into a common data format, apply standardized document coding, or metadata, and assign relevant keywords, including ticker symbols of any public companies mentioned in the story. After the processing has been completed, data management software sorts each news story into topic-defined product categories. All content is processed and distributed in real-time without human intervention. In addition, the processing system was designed to provide for the creation of new products and new metadata without significant additional production or development resources. Thus, we can create new products from existing content sources for minimal additional investment or ongoing cost. Customers, Sales and Marketing Our customers include business and consumer online services, personal investor web sites, general information web sites, Wall Street stock quote vendors, electronic clipping services and wireless information services who create products and services using our products. These information service providers then resell these products and services to end-user markets, business users and corporations. These end-users use our customers' services for market research, business intelligence, investment analysis and entertainment. Our marketing strategy is to provide the content infrastructure to our customers, who are predominantly information service providers. Our customers, in turn, spend product development and marketing dollars to attract end-users to their services and product offerings. In this way, we take advantage of the product and marketing investment of our customers to attract and assemble a broad user base for our content offerings. Our sales force is focused on our four primary markets -- professional investor, individual investor, Internet and corporate information services markets. The sales force receives a base salary and earns commissions on both new customers and revenue growth from existing customers. Our total compensation plan is consistent with industry compensation practices. Product and Service Offerings The core products currently supported by our technical and customer service departments include a series of topic-defined news products marketed under the brand name CustomWires. We also support production of original news products under the brand name COMTEX Newsroom. Other services include processing and distribution of publishers' full feeds and hosting and application services called News Solutions. CustomWires CustomWires are topic-defined newswires that contain only topic-relevant stories from more than 20,000 stories daily, from more than 70 publishing alliances. Stories are selected by automated editorial software according to the significance of the story's content relative to specific CustomWires topics. We offer fifteen topics under the CustomWires brand name: Business, Community, Energy, Environment, Finance, Foreign Business, Government, Healthcare, High Technology, International, Public Companies, SEC, Sports, Wall Street and World Affairs and an additional eleven geographical CustomWires focusing on specific international regions. Newsroom Our Newsroom enhanced products provide editorially selected top news in twelve categories. A broad range of news story options includes financial markets, industries, general market and world news. Our editors are skilled at evaluating incoming news feeds for items that will directly affect business and investment decisions in a variety of markets. This expertise ensures that our customers receive relevant and compelling content. The COMTEX Newsroom, Top Headlines, Front Page, Financial Updates, Industry Updates and Personal Finance products are designed specifically to satisfy distributors interested in reaching a broad audience of business end-users. Top Headlines. Top Headlines is an editorial service that selects up to five of the most significant news stories of the day in each of twelve topic-based CustomWires (Business, Internet, Community, Energy, Entertainment, Environment, Finance, Government, Healthcare, High-Tech, International, and Sports) and are delivered five times every weekday. In addition, International, Government, Business, Finance, Community and Sports are updated once a day on Saturday and Sunday. Front Page. Front Page is designed to reflect the front page of major U.S. newspapers. Our editors select the day's top ten news stories highlighting key global news, which is delivered five times every weekday and once a day on weekends. Financial Updates. Financial Updates keep businesses informed of the financial market. Our editors deliver the most relevant and pertinent financial information from leading financial information sources twice every weekday. Our editors provide the basic overview, productivity and analysis for international and U.S. stock markets and the global bond and fund markets and also monitor key company mergers, acquisitions, stock buyouts, hostile takeovers and all economic indicator announcements and data releases from the Federal Reserve Bank, Labor Department, Commerce Department, Purchasing Managers Index, etc. Industry Updates. Industry Updates afford leading decision- makers timely and competitive information needed to remain leaders within their specific industry. A list of the top seven to ten stories from each industry category is generated and distributed to customers once a day on weekdays. These categories include vertical industries such as Airlines, Automobile, Banking, Hardware, Insurance, Oil, Publishing, Telecommunications and Utilities. Personal Finance. Personal Finance highlights personal investment opportunities, banking, insurance, financial planning, and financial security. Editors compile five to seven stories daily on weekdays, from well-known financial providers, to deliver relevant information on stock tracking, credit maintenance, taxes, home mortgage, online banking and a host of other specific topics devised to meet the needs of the individual investor. Publisher Full Feeds Our full feed delivery from a specific publisher provides customers with the complete content offering from that publisher. The content is delivered with our electronically enhanced metadata, ticker symbols and standardized keywords, allowing the customer to find the most relevant stories and use the content in conjunction with other COMTEX content. Our full-feed distribution offers: o conversion of publisher's content into a standard electronic format designed to enhance and facilitate data management; o addition of text-related keywords, product codes, and ticker symbols designed to increase usage of publisher's content only; o one integration effort for multiple publishers; and o 24 by 7 monitoring by our technical staff of the publisher's content News Solutions During fiscal year 2001, we launched News Solutions, a suite of browser-based news applications that allows customers to integrate news directly into any web site, intranet or extranet. News Solutions customers determine the specific news required for their application from any of our product lines -- CustomWires, Newsroom or Publisher Full Feeds -- and easily, without programming effort place the content on their site. News Solutions implementation allows the customer to maintain the look and feel of their own web site. News Solutions allows customers to refine the news categories to display only the news that meets their needs. News Solutions provides access to the largest quantity and highest quality of real-time news on the Internet, and customers only have to add a few lines of News Solutions-generated HTML compatible code to any web page. With us hosting the content and applications, the customer requires minimal support or maintenance. Processing Utilizing the same automated editorial and format conversion process, we also offer news processing services to distributors and content providers. The content providers and distributors take advantage of, and leverage the standardized format and value- added processing for all their content. These services increase the reliance those content providers and distributors have on us and, at the same time, attract additional customers to us. Product Development Product development activities include quality assurance, product enhancements and the development of proprietary news products. For the years ended June 30, 2001, 2000 and 1999 our product development costs were approximately $605,000, $456,000 and $270,000, respectively. During fiscal years 2000 and 2001, we made significant investments in product development infrastructure and development of new products, as well as additional quality assurance activities. Employees We hired 45 new employees across all departments between July 2000 and March 2001 to accommodate an increase in new distributors and content providers. Although we gained 176 new distributors during fiscal year 2001, more than 150 existing distributors terminated their contracts with us, many due to their lack of funding and/or bankruptcies, over the same period. As a result, in June and August 2001, we initiated reductions in force affecting a total of 29 employees. At September 21, 2001, we had 54 full-time employees. The employees are not members of a union and we believe employee relations are generally good. Available Information We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC- 0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's Web site at "http://www.sec.gov." Item 2. Properties We own no real estate. We lease office space at 4900 Seminary Road in Alexandria, Virginia. We currently occupy approximately 22,700 square feet at an annual rental of approximately $554,000. The lease agreement on approximately 15,700 square feet expires in August, 2002. The lease on the remaining space of approximately 7,000 square feet expires in August, 2003. Item 3. Legal Proceedings We were named as a defendant in a lawsuit filed in the United States District Court for the Northern District of Alabama, Northeastern Division on August 25, 2000. The suit was captioned Clyde Collins Pearson (the "Plaintiff") Individually and In His Capacity As Representative of the Class of Emulex Corporation Shareholders Similarly Situated v. Internet Wire, Inc.; Comtex News Network, Inc.; and Emulex Corporation. The suit related to Plaintiff's sale of Emulex Corporation stock in response to a false news release disseminated by or on behalf of various defendants, including COMTEX. The complaint alleged that the defendants failed to take reasonably necessary precautions to prevent the distribution of the false press release attributed to Emulex. Plaintiff sought $120,000 in actual damages, and additional punitive damages. We filed a motion to dismiss the complaint, which was granted by the Court and the case was dismissed against all defendants on July 5, 2001. The time for filing a notice of appeal has since expired. On July 17, 2001, we filed a collection action against Infospace, Inc., a former customer, in the United States District Court for the Eastern District of Virginia for payments owed under contracts with the defendant corporation. The suit is captioned Comtex News Network, Inc. v. Infospace, Inc. Infospace filed an Answer and Counterclaim alleging we breached our agreement and seeks damages of $1,000,000 for lost business, loss of reputation and good will. We intend to vigorously defend ourselves against the allegations in the counterclaim. We are also involved in routine legal proceedings occurring in the ordinary course of business which in the aggregate are believed by management to be immaterial to our financial condition. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Shares of our common stock, par value $.01 per share, which we refer to herein as our Common Stock, are traded sporadically under the symbol CMTX on 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 2000 and 2001 is shown below: Fiscal Year Ended June 30, 2000 High Low ------------------------------- ------ ------ First Quarter (7/1 to 9/30/99) 2.6250 1.3125 Second Quarter (10/1 to 12/31/99) 3.1875 1.0625 Third Quarter (1/1 to 3/31/00) 8.5000 3.1875 Fourth Quarter (4/1 to 6/30/00) 6.7500 2.7500
Fiscal Year Ended June 30, 2001 High Low ------------------------------- ------ ------ First Quarter (7/1 to 9/30/00) 5.2500 3.0000 Second Quarter (10/1 to 12/31/00) 3.5625 1.5000 Third Quarter (1/1 to 3/31/01) 2.6875 1.0625 Fourth Quarter (4/1 to 6/30/01) 1.6000 0.7300
The approximate number of holders of record of our Common Stock as of September 21, 2001 was 563. 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 2001 2000 1999 1998 1997 share data) -------- -------- ------- ------- ------- Total Revenues $ 16,598 $ 12,645 $ 7,557 $ 5,401 $ 4,592 Operating Income $ 310 $ 1,308 $ 542 $ 156 $ 228 Net Income $ 265 $ 1,241 $ 456 $ 64 $ 113 Basic Net Income Per Share $ .03 $ .14 $ .06 $ .01 $ .01 Diluted Net Income Per Share $ .02 $ .10 $ .04 $ .01 $ .01 Balance Sheet Data at Year End: Total Assets $ 6,565 $ 5,977 $ 2,407 $ 1,434 $ 1,531 Long-term Obligations $ 954 $ 987 $ 1,047 $ 833 $ 788
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Our revenue is primarily derived from charges to distributors for the licensing of content, including CustomWires, Newsroom products and the publishers' full feeds, as well as from News Solutions hosting services. Distributor licenses typically consist of fixed fees as well as minimum royalty commitments. Royalties are based upon the customer's business and revenue model such that their success in their market generates increasing revenues for us. We also derive data communications revenue for charges to distributors for the actual delivery of our products. Other sources of revenue include content processing for distributors and processing and distribution services for content providers. Several distributors have found it advantageous to have us process their proprietary content for them so that it is in our format. Processing fees may include initial implementation fees, monthly minimums and a percentage of the royalties earned by the licensor of the content. Similarly, several content providers have contracted to deliver their content through our processing system to take advantage of our packaging, formatting and delivery of their content to their own customers. Processing revenues may consist of implementation fees, monthly minimums and a percentage of their revenues earned. Although we are based in the United States, we may in the future attempt to increase the number of our distributors and content-providers and improve our technology by establishing operations and/or joint ventures internationally. RESULTS OF OPERATIONS Comparison of the Fiscal Year ended June 30, 2001 to the Fiscal Year ended June 30, 2000 Revenues consist primarily of royalty revenues and fees from the licensing of content products to information distributors, as well as revenues from data communications charges for delivery of our products. During the year ended June 30, 2001, our total revenues were approximately $16,598,000, an increase of approximately $3,952,000, or 31%, from total revenues of $12,645,000 for the year ended June 30, 2000. Our revenues from new customers were partially offset by a decline in revenues from existing customers. Many of these customers were in the Internet and personal investor markets who declared bankruptcy or who were unable to obtain funding and remain in business. Our cost of revenues consists primarily of content licensing fees and royalties to content providers, as well as data communication costs for the delivery of our products to customers. The cost of revenues for the year ended June 30, 2001 was approximately $4,678,000, an increase of approximately $856,000, or 22%, from the cost of revenues for the year ended June 30, 2000. The increase in cost is primarily due to an increase in content royalties related to the increase in revenues for the period, because the contracts with our content providers call for licensing fees to increase along with royalty payments to us. The increase is offset partially by decreases in data communications costs resulting from the continued implementation of more cost- effective vehicles for the delivery of our products to our customers. With the increased reliability and industry-wide acceptance of the Internet, we have transitioned customers from higher cost satellite/FM and leased line deliveries to FTP delivery of our content. The gross profit for the year ended June 30, 2001 was approximately $11,920,000, an increase of approximately $3,097,000, or 35%, over the prior year. The gross margin percentage improved for the year ended June 30, 2001 to approximately 72% from approximately 70% in the prior year due to the decrease in data communications costs discussed above. Total operating expenses for the year ended June 30, 2001 were approximately $11,609,000, an increase of approximately $4,095,000, or 54%, from the operating expenses for the year ended June 30, 2000. This increase in operating expenses includes increases in expenses associated with the addition of personnel and technology to support increased distributors and content providers; increases in marketing and public relations activities; and expenditures to promote COMTEX and our products and services. In addition, we incurred an increase of approximately $315,000 in stock-based compensation. Technical operations and support expenses during the year ended June 30, 2001 increased approximately $1,131,000, or 54%, over these expenses in the year ended June 30, 2000. This increase was due primarily to increased personnel, software and maintenance expenses, offset partially by decreased consulting expenses related to software support of our former content-processing platform. Product development expenses increased by approximately $150,000, or 33%, for the year ended June 30, 2001 compared to the year ended June 30, 2000. This increase is the result of additional personnel and related expenses. Product development activities include quality assurance, enhancements to our products, and the development of proprietary news products. Sales and marketing expenses increased by approximately $429,000, or 19%, for the year ended June 30, 2001 compared to the year ended June 30, 2000. This increase was due to the addition of sales and marketing personnel and advertising and public relations expenses related to the promotion and branding of COMTEX and our products and services. General and administrative expenses for the year ended June 30, 2001 were approximately $1,540,000, or 64%, greater than these expenses during the year ended June 30, 2000. This increase was due to additional personnel and related expenses, increased legal fees and investor relations consulting, expanded office space and an increase of approximately $598,000 in the provision for bad debts. The increase in bad debt expense relates in large part to the loss of customers due to their lack of funding and/or bankruptcies. In connection with the transfer of stock options from the chairman of our board of directors to certain employees, we recorded stock-based compensation expense of approximately $315,000 during the year ended June 30, 2001. We did not record stock-based compensation during fiscal year 2000. Depreciation and amortization expenses for the year ended June 30, 2001 were approximately $531,000, or 218% higher than these expenses during the prior year. The increase was due primarily to the deployment of upgraded production software and hardware and increased capital expenditures related to increasing capacity and redundancy of our production systems, as well as furniture and equipment for the addition of personnel. Other expense, net of interest income and interest expense, decreased approximately $24,000, or 36%, during the year ended June 30, 2001 from the prior year, reflecting an increase in interest income earned on our cash balances. Comparison of the Fiscal Year ended June 30, 2000 to the Fiscal Year ended June 30, 1999 We earned operating income of approximately $1,308,000 during the year ended June 30, 2000, compared to operating income of $542,000 during the year ended June 30, 1999. We earned net income of approximately $1,241,000 during the year ended June 30, 2000, compared to net income of approximately $456,000 for the year ended June 30, 1999. As discussed below, the improvement in operating income and net income was due primarily to a 67% growth in revenues and an improved gross profit margin, offset partially with a 62% corresponding increase in cost of revenues and operating expense. The improvement in net income also included an increase in interest income earned on cash balances. The fiscal year 2000 results reflect fourth quarter revenues that included the resolution of royalties due for content usage during fiscal year 2000 and prior periods previously unreported to us by a single distributor. The resolution increased revenues, gross profit, operating income and net income by $250,000, $207,000, $138,000 and $138,000, respectively. Our revenues consist primarily of royalty revenues and fees from the licensing of content products to information distributors, as well as revenues from data communications charges for delivery of our products. During the year ended June 30, 2000, our total revenues were approximately $12,645,000, or approximately $5,088,000, or 67%, greater than the total revenues for the year ended June 30, 1999. Of the increase in revenues, approximately 54% reflects revenues from new customers obtained during the twelve months ended June 30, 2000, with the remaining 46% reflecting growth in revenues from the existing customer base. Our cost of revenues consists primarily of content license fees and royalties earned by our content providers for the distribution of content, as well as data communication costs for the delivery of our products to our customers. The cost of revenues for the year ended June 30, 2000 was approximately $3,822,000, or $1,009,000, or 36%, greater than the cost of revenues for the year ended June 30, 1999. The increase in cost is primarily due to an increase in content royalties related to the increase in revenues for the period. The increase is offset partially by decreases in data communications costs resulting from the implementation of a more cost effective method for delivery of our products to customers, as well as an improvement in earned minimum royalties for certain information providers. The gross profit for the year ended June 30, 2000 was approximately $8,823,000, or a $4,079,000 (86%) improvement in gross profit over the prior year. The gross margin percentage improved for the year ended June 30, 2000 to approximately 70% from approximately 63% in the prior year due to both a decrease in the royalty percentage paid for content and the decrease in data communications costs. The decrease in the royalty percentage was the result of an improvement in earned minimum royalties for certain information providers. Total operating expenses for the year ended June 30, 2000 were approximately $7,514,000, representing an approximately $3,313,000, or 79%, increase in operating expenses from the year ended June 30, 1999. This increase in operating expenses is due primarily to increases in expenses associated with increased headcount and technology and general business consultants as we made investments in infrastructure. In addition, we increased marketing and public relations activities and expenditures to promote the Company and our products and services. Technical operations and support expenses during the year ended June 30, 2000 increased approximately $1,184,000, or 128%, over these expenses in the year ended June 30, 1999. This increase was due primarily to increased headcount and consulting costs associated with technology projects and client support. Product development expenses increased by approximately $186,000, or 69%, for the year ended June 30, 2000 compared to the year ended June 30, 1999. This increase is the result of additional personnel in this department. Product development activities include quality assurance, enhancements to our products, and the development of proprietary news products. Sales and marketing expenses increased by approximately $1,000,000, or 78%, for the year ended June 30, 2000 compared to the year ended June 30, 1999. The increase was due to increased compensation arising from the addition of sales and marketing personnel, additional commissions based on the increase in revenues during the year, as well as marketing and public relations expenses related to the promotion and branding of the Company and our products and services. General and administrative expenses for the year ended June 30, 2000 were approximately $805,000, or 50%, greater than these expenses during the year ended June 30, 1999. This increase was due to additional personnel and related benefits, executive incentive compensation programs, expanded office space, recruitment, professional fees and general business consulting, offset partially by a decrease in the provision for bad debts. Depreciation and amortization expenses for the year ended June 30, 2000 were approximately $138,000, or 131%, higher than these expenses during the prior year. The increase was due primarily to the development and deployment of new platforms for our products and services as well as capital expenditures to support additional personnel. Other expense decreased by approximately $19,000, or 22%, from the year ended June 30, 1999, and reflected an increase in interest income earned on our cash balances, partially offset by increased interest expense. Income tax expense remained unchanged for the year ended June 30, 2000 compared to the prior year. Except for nominal franchise fees, we did not record an income tax expense due to the utilization of Net Operating Loss (NOL) and Investment Tax Credit (ITC) carryforwards. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For the year ended June 30, 2001, our operations produced operating income of approximately $310,000 and net income of approximately $265,000. At June 30, 2001, we had working capital of approximately $131,000 as compared with working capital of approximately $1,316,000 at June 30, 2000. The decrease in working capital was due primarily to the use of cash for capital expenditures discussed below. We had net stockholders' equity of approximately $3,109,000 at June 30, 2001, as compared to net stockholders' equity at June 30, 2000, of approximately $2,378,000. The increase in stockholders' equity was due to the retention of net income, as well as the issuance of stock under our Stock Option and Employee Stock Purchase Plans. For the year ended June 30, 2001, our operating activities generated approximately $1,338,000 in cash. We had cash of approximately $367,000 at June 30, 2001, compared to approximately $1,655,000 at June 30, 2000. To date, our operations have generated cash flow sufficient to cover our monthly expenses. We have reinvested a significant portion of our operating cash flows. This includes investments in administrative, sales, marketing and technical personnel and in expanding our contractual base with content-providers so as to improve the quality and flexibility of our information products. All of these factors contribute to improving our ability to sell and deliver quality products and services. In addition, we made capital expenditures of approximately $2,684,000 in the year ended June 30, 2001, to increase the capacity and redundancy of our production systems, accommodate additional personnel and office space and upgrade administrative software. These investments improve our product capabilities, reliability and our ability to meet future content and client processing requirements. We anticipate continued investment, although at decreased levels, to expand product capabilities, technology platforms and infrastructure. We do not anticipate significantly increasing our number of employees over the next 12 months. We lost over 150 customers during fiscal year 2001; primarily due to failing business models and businesses, bankruptcies or lack of funding and consolidation within the Internet, Wall Street and corporate-reseller markets. We have responded to the loss of this annuity revenue by appropriate operating expense reductions and continue to focus on cost-savings efforts. These efforts include reductions in force in June and August 2001, impacting a total of 29 employees, as well as limitations on discretionary spending. In June 2001, we obtained a $500,000 line of credit to assist us with short- term fluctuations in cash flow, if necessary. The line of credit bears interest at the Prime Rate and expires June 29, 2002. To date we have not used this facility but may do so in the future. In August 2001, we signed an amendment to the 10% Senior Subordinated and Secured Note payable to AMASYS Corporation, or AMASYS, extending the term of the note from July 1, 2002 to July 1, 2008. Included in the amendment is a provision for AMASYS to convert all or a portion of the outstanding principal amount, plus accrued interest, into common stock of COMTEX. The note is convertible at a price of $1.00 per share, which price increases by $0.10 upon each anniversary of the amendment. There is no restriction on the number of shares that may be issued upon conversion of the note. Currently, our operations generate cash flow sufficient to cover our monthly expenses and we believe that cash from operations will provide us with adequate cash resources to meet our obligations on a short-term basis. Our ability to meet our liquidity needs on a long- term basis depends on our ability to generate sufficient revenues and cash to cover our current obligations and to pay down our current and long-term debt obligations. Any further corporate consolidation or market deterioration affecting our customers could limit our ability to generate such revenues. No assurance may be given that we will be able to maintain the revenue base or the size of profitable operations that may be necessary to achieve our liquidity needs. EBITDA, as defined below, decreased approximately 10% to $1,398,000 for the year ended June 30, 2001 compared to $1,552,000 for fiscal year 2000. The decrease is primarily due to the increase in operating expenses, excluding stock-based compensation and depreciation and amortization, partially offset by increased revenues and the improvement in gross profit margin. EBITDA consists of earnings before interest expense, interest and other income, income taxes, stock-based compensation and depreciation and amortization. EBITDA does not represent funds available for management's discretionary use and is not intended to represent cash flow from operations. EBITDA should also not be construed as a substitute for operating income or a better measure of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles. EBITDA excludes components that are significant in understanding and assessing our results of operations and cash flows. In addition, EBITDA is not a term defined by generally accepted accounting principles and as a result our measure of EBITDA might not be comparable to similarly titled measures used by other companies. However, we believe that EBITDA is relevant and useful information, which is often reported and widely used by analysts, investors and other interested parties in our industry. Accordingly, we are disclosing this information to permit a more comprehensive analysis of our operating performance, as an additional meaningful measure of performance and liquidity, and to provide additional information with respect to our ability to meet future debt service, capital expenditure and working capital requirements. See the audited financial statements and notes thereto contained elsewhere in this report for more detailed information. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS An investment in our common stock involves a high degree of risk. The following risk factors should be considered carefully in evaluating COMTEX News Network and our business. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. Our financial condition, operating results and the trading price of our common stock could be materially, adversely affected due to any of these risks, in which case you could lose all or part of your investment. In assessing these risks, you should also refer to the other information in this and our other public filings, including our financial statements and notes thereto. We Depend On the Continued Growth In the Use of the Internet, Particularly For News and Financial Information Our business depends on businesses and consumers continuing to increase their use of the Internet for obtaining news and financial information. Internet usage may be inhibited for a number of reasons including inadequate network infrastructure; security concerns; inconsistent quality of service; and availability of cost-effective, high-speed service. Because the market for our products is rapidly evolving, it is difficult to predict with any certainty the growth rate, if any, and the ultimate size of our markets. If the market fails to continue to develop, develops more slowly than expected or becomes saturated with competitors; if our services do not maintain significant market acceptance; if our customers' business models are not successful; or if pricing becomes subject to considerable competitive pressures; our business operations and financial condition would be materially, adversely affected. We Face Intense Competition That Could Impede Our Ability to Grow and Maintain Profitability The business information services industry is intensely competitive and is characterized by rapid technological change and entry into the field by large and well-capitalized companies. Many of our competitors have substantially greater financial, technical and marketing resources than we do. Our competitors include Internet-focused aggregators and distributors of content, individual national and international electronic news and information services, and traditional content providers seeking new markets for their content or seeking direct relationships with distributors. We expect competition to continue to increase as the market for content aggregation increases, as current competitors improve their offerings, as new competitors attempt to enter the market, and as traditional content providers seek new markets for their content and direct relationships with distributors. While we believe our continued investment in content, new products and technology, as well as the expansion of our distributor partnerships will continue to favorably position us in the market, it is possible that our competitors may acquire significant market share and we may not be able to retain our customers. Furthermore, increased competition on the basis of price, delivery systems or otherwise, may require us to implement price reductions or increase our spending on marketing or software development, which could have a material, adverse affect on our business and operating results. If We Are Unable to Maintain Our Reputation and Expand Our Name Recognition, We May Have Difficulty Attracting New Business and Retaining Current Customers and Employees We believe that establishing and maintaining a good reputation and name recognition are critical for attracting and retaining customers and employees. We believe that the importance of reputation and name recognition will increase due to the growing number of providers of Internet services. If our reputation is damaged or if potential customers are not familiar with us, we may be unable to attract new, or retain existing, customers and employees. Promotion and enhancement of our name will depend largely on our success in continuing to provide effective services. If customers do not perceive our services to be effective or of high quality, our brand name and reputation will suffer. Some of Our Customers Are Recently Established Internet Companies Who Pose Credit Risks While we continue to attract and retain large and mid-sized, established customers, a number of our customers are smaller Internet companies with limited operating histories, who operate at a loss and have limited cash reserves and limited access to additional capital. With some of these customers, we have experienced difficulties collecting accounts receivable. In addition, we lost over 90 customers directly due to the failure of their business models to sustain operations. As a result, our bad debt expense for the year ended June 30, 2001, was approximately $824,000, an increase of $598,000 over the previous fiscal year. We may continue to encounter these difficulties in the future. If any significant part of our customer base continues to experience economic difficulties or is unable to pay our fees, for any reason, our business would be materially, adversely affected. We Could Face Additional Risks and Challenges as We Expand Internationally and May Face Unexpected Costs in Developing International Revenues We have created a foreign corporation in anticipation of expanding to international operations. If our revenues from international operations do not exceed the expense of establishing and maintaining these operations, our business, financial condition and operating results may be materially, adversely affected. We have only limited experience in international operations and we may not be able to capitalize on our investment in these markets. In addition, there are risks inherent in doing business internationally, including unexpected changes in regulatory requirements, potentially adverse tax consequences, export restrictions and controls, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, political instability, fluctuations in currency exchange rates, and seasonal reductions in business activity during the summer months. Any of these risks could have a material, adverse affect on the success of our international operations and on our business, financial condition and operating results. Unauthorized Break-ins to Our Systems Could Harm Our Business Although we have implemented strict security policies and perimeter defenses, our computer and telecommunications systems are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions in, delays in or loss of data. In addition, unauthorized persons may improperly access our data. Any intrusions may harm us and may be very expensive to remedy and could damage our reputation and discourage new and existing customers from using our service. If Equipment Failures Interrupt the Distribution of Content to Our Customers, We Could Lose Customers and Our Reputation May Be Adversely Affected We rely on third-party telecommunications networks for the distribution of our content. Any failure of these networks could interrupt or delay our service, which could lead to customers canceling contracts and could damage our reputation and our ability to attract additional customers. Substantially all of our computer and communications hardware resides in one location in Alexandria, Virginia. Any disaster, power outage or system failure that causes interruptions in our ability to provide our services to our customers could reduce customer satisfaction and our ability to attract additional customers. Losing Major Content Providers May Leave Us With Insufficient Breadth Of Content To Retain And Attract Customers We do not generate original content and are therefore highly dependent upon third-party content providers. If we were to lose one of our major content providers and were not able to obtain similar content from another source, our services would be less attractive to customers. In addition, we cannot be certain that we will be able to license content from our current or new providers on favorable terms in the future, if at all. We Depend on Key Personnel Our future success will depend to a significant extent on the continued services of our senior management and other key personnel. We do not maintain "key person" life insurance for any of our personnel. Our future success will also depend on our ability to attract, retain and motivate other highly skilled employees. Companies in our industry compete intensely to hire and retain qualified personnel and if we are not able to attract the employees we need or retain the services of those we have hired, our business operations would be materially, adversely affected. Our Common Stock Price is Volatile and Could Fluctuate Significantly The trading price of our Common Stock has been, and may continue to be, subject to wide fluctuations. Our stock is traded on the Over-the-Counter Bulletin Board of the National Association of Securities Dealers, which limits our exposure to market analysts, and in turn may limit our volume of trading. During fiscal year 2001, the closing prices of our Common Stock ranged from $0.75 to $6.125. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results; announcements of technological innovations or new products by us or our competitors; the operating and stock price performance of other companies that investors may deem comparable; and 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 diversion of management's attention during the acquisition process; costs, delays and difficulties of integrating the acquired company's operations, technology and personnel into our operations; the adverse affect on earnings of amortizing any intangible assets acquired; the issuance of new equity securities diluting the holdings of existing stockholders; and the uncertainty of working with new employees and customers. We Do Not Intend to Pay Dividends We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future. Our Executive Officers, Directors and 5% or Greater Stockholders Significantly Influence All Matters Requiring Stockholder Vote Our executive officers and directors, in the aggregate, beneficially own approximately 50% of our outstanding common stock. As a result, our executive officers and directors are able to significantly influence the outcome of all matters requiring approval by our stockholders, including the election of directors and approval of significant transactions. This concentration of ownership could delay, deter or prevent a change of control and could adversely affect the price that investors are willing to pay in the future for shares of our common stock. Item 7A. Quantitative and Qualitative Disclosure about Market Risk. None. 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. PART III Item 10. Directors and Executive Officers of the Registrant Directors The following table contains information as of October 22, 2001 as to each director of the Company: Name Age Office Held with Company ---- --- ------------------------ C.W. Gilluly, Ed.D. 55 Chairman of the Board Erik Hendricks 57 Director Robert A. Nigro 52 Director Charles W. Terry 50 President, Chief Executive Officer and Director John D. Sanders, Ph.D. 63 Director John S. Brunette 42 Director C.W. GILLULY, Ed.D., has served as a director and Chairman of the Board of the Company since 1992. Dr. Gilluly served as President of the Company from June 1992 until May 1993, and as Chief Executive Officer from June 1992 until September 1997. Dr. Gilluly has served as Chairman of the Board and President of AMASYS and its predecessor, Infotechnology, Inc., since June 1992. ERIK HENDRICKS has served as a director of the Company since 1991. Since 1979 he has served as the Executive Director and Chief Operating Officer of the Pennsylvania Society for the Prevention of Cruelty to Animals, a non-profit humane society. ROBERT A. NIGRO has served as a director of the Company since 1991. Mr. Nigro is an investment banker who specializes in corporate development and turnarounds. Since April 1995, Mr. Nigro has served as Chief Executive Officer of SEI Capital AG. He joined SEI Investments Company as Senior Vice President in November 1993. From 1991 to 1993, Mr. Nigro was Chairman and Chief Executive Officer of the National Abandoned Property Processing Company. Mr. Nigro was associated with the First Boston Corporation in various capacities from 1976 to 1990 including serving as Managing Director in the New York and Atlanta offices. Mr. Nigro also serves as a director of AMASYS. CHARLES W. TERRY was appointed President of the Company in August 1994 and has served as a director since December 1994. Mr. Terry was appointed Chief Executive Officer in September 1997. From August 1992 until he joined the Company, Mr. Terry was President of Corporate Cost Management, Inc., an organization specializing in cost management and decisions support software for the healthcare industry. From March 1992 to August 1992, Mr. Terry served as Vice President of Sales and Marketing for Health Payment Review, Inc., a corporation specializing in containment software for health insurance and managed care companies. From 1977 to 1991, Mr. Terry held various key leadership posts in the fields of development, sales, marketing and general management at CompuServe, a leading provider of computer-based information and communication services. JOHN D. SANDERS, Ph.D., has served as a director of the Company since 1998. Dr. Sanders serves as a business consultant to emerging technology companies. He was Chairman and Chief Executive Officer of TechNews, Inc., publisher of Washington Technology newspaper, from 1988 to 1996, prior to its sale to The Washington Post Company. In addition, Dr. Sanders has been a Registered Representative of Wachtel & Co., Inc., a Washington D.C.-based stock brokerage firm, since 1968. Dr. Sanders serves on the boards of ITC Learning Corporation, SenSys Tech, Inc. and Hadron, Inc. JOHN S. BRUNETTE, has served as a director of the Company since 2000. Mr. Brunette serves as Senior Vice President and General Counsel of Teleglobe Communications Corporation. Mr. Brunette joined Teleglobe as Senior Vice President, General Counsel and Secretary in October 1998. Prior to that, he was Assistant General Counsel of MCI Communications Corporation ("MCI") for over 12 years. During his tenure at MCI, Mr. Brunette was responsible for the finance, securities, and mergers and acquisitions activities of MCI and its subsidiaries. Mr. Brunette has directed numerous transactions involving equity investments, debt issuances, and technologies in the Internet and telecommunications sectors. Executive Officers ------------------ The following table contains information as of October 22, 2001 as to the executive officers of the Company who are not also directors of the Company: Name Age Office Held With Company ---- --- ------------------------ Robin Y. Deal 37 Vice President, Finance & Accounting Slawek Ligier 35 Vice President, Chief Technology Officer ROBIN Y. DEAL was appointed Vice President, Finance & Accounting of the Company in January 2001. Ms. Deal is responsible for all of the Company's financial matters. Ms. Deal began her tenure with the Company in 1996 as the Controller and was promoted to Vice President, Finance & Accounting in January 2001. Prior to joining the Company, Ms. Deal was the Controller for Micro Research Industries (a division of Telecommunications Industries, Inc.). SLAWEK LIGIER was appointed Vice President, Chief Technology Officer in January 2001. Mr. Ligier, brings 14 years of managerial and technical experience to the Company. Mr. Ligier joined the Company from Intuit Insurance Services (a fully owned subsidiary of Intuit Incorporated) where he served as the Vice President and Chief Technical Officer from 1998 to 2001. Mr. Ligier not only brings great technical knowledge but also an understanding of the financial industry, which he gained from his previous employment with Ernst & Young LLP from 1996 to 1998 and KPMG in 1994. There are no family relationships among the directors or executive officers of the Company. Compensation of Directors During fiscal year 2001, the Company's directors were reimbursed for travel expenses in connection with attendance at Board of Directors' meetings. Non-employee directors of the Company also received a fee of $1,000 for each Board of Directors' meeting attended. Employee directors did not receive additional compensation for Board of Directors' meeting attendance. The Company's directors did not receive any compensation for committee participation during fiscal year 2001. In addition to the amounts described above, both Dr. Sanders and Mr. Brunette provide consulting to the Company on business and financial matters for which they received a monthly retainer of $2,500 during Fiscal Year 2001. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's officers, directors and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% shareholders are required by the regulation to furnish the Company with copies of the Section 16(a) forms which they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company, and written representations that no other reports were required during the fiscal year beginning July 1, 2000 and ended June 30, 2001, all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than ten percent shareholders were complied timely. Item 11. Executive Compensation Summary Compensation Table The following table sets forth information concerning all compensation paid or accrued by the Company to its Chief Executive Officer, President and the other executive officers of the Company who earned total salary and bonus in excess of $100,000 during the fiscal year ended June 30, 2001 (collectively, the "Named Executive Officers"): Annual Compensation Long-Term Compensation Awards Name and Fiscal Shares Underlying All Other Principal Position Year Salary Bonus Options Compensation C.W. Gilluly 2001 $ 74,149 - - - Chairman 2000 $ 70,123 - - - 1999 $ 61,553 - - - Charles W. Terry 2001 $ 194,492 $ 32,777 - - President and 2000 $ 169,438 $ 295,715 - - Chief Executive Officer 1999 $ 154,897 $ 103,851 736,500 - Robin Y. Deal 2001 $ 93,484 $ 12,500 50,000 - Vice President, Finance 2000 $ 70,720 $ 4,860 12,000 - & Accounting 1999 $ 63,807 $ 5,775 25,500 - Deborah W. Ikins 2001 $ 176,386 - 40,000 - Executive Vice President 2000 $ 253,287 $ 32,760 45,000 - 1999 $ 128,295 $ 11,205 95,500 - Sheri Robey-Lapan 2001 $ 140,306 - 33,000 - Vice President, Marketing 2000 $ 95,950 $ 18,428 83,000 - and Corporate Strategy 1999 - - - - Dr. Gilluly served as President of the Company from June 1992 until May 1993 and continues to serve the Company as its Chairman. He served as Chief Executive Officer from June 1992 to September 1997. See "Executive Compensation - Board of Directors Interlocks and Insider Participation." Mr. Terry was appointed President of the Company in August 1994. He was appointed Chief Executive Officer in September 1997. Ms. Deal was appointed Vice President, Finance & Accounting in January 2001. Ms. Ikins' employment with the Company terminated on September 18, 2001. Ms. Robey-Lapan's employment with the Company terminated on August 1, 2001. Granted pursuant to the Company's 1995 Stock Option Plan. See "Executive Compensation - Stock Option Grants." Includes options to acquire 60,000 shares of Common Stock which were granted pursuant to the Company's 1995 Stock Option Plan and 676,500 shares of Common Stock underlying options which were granted pursuant to a transfer by Dr. Gilluly of options held by Dr. Gilluly that were previously granted by the Company. Includes options to acquire 15,000 shares of Common Stock which were granted pursuant to the Company's 1995 Stock Option Plan and 10,500 shares of Common Stock underlying options which were granted pursuant to a transfer by Dr. Gilluly of options held by Dr. Gilluly that were previously granted by the Company. Includes options to acquire 85,000 shares of Common Stock which were granted pursuant to the Company's 1995 Stock Option Plan and 10,500 shares of Common Stock underlying options which were granted pursuant to a transfer by Dr. Gilluly of options held by Dr. Gilluly that were previously granted by the Company. In fiscal years 2001, 2000 and 1999, Ms. Ikins earned base salaries of $116,386, $111,700 and $95,025, respectively. She earned commissions of $60,000, $141,587 and $33,270 respectively in fiscal years 2001, 2000 and 1999, based on the Company's achieving or exceeding certain targeted revenue goals.
Stock Option Grants The following table provides details regarding all stock options granted to the Named Executive Officers during the fiscal year ended June 30, 2001: Option Grants in Fiscal Year 2001
Number of % of Total Options Shares Underlying Granted Exercise Expiration Name Options Granted in Fiscal Year Price Date ---- --------------------- ------------------ -------- ---------- C.W. Gilluly - - - - Charles W. Terry - - - - Robin Deal 18,000 2.51% $1.81 12/07/2010 32,000 4.46% $2.50 02/01/2011 Deborah W. Ikins 40,000 5.58% $1.81 12/07/2010 Sheri Robey-Lapan 33,000 4.60% $1.81 12/07/2010 Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term 5% 10% ---------------------------------- C.W. Gilluly - - Charles W. Terry - - Robin Deal $ 20,489 $ 51,924 $ 50,312 $ 127,499 Deborah W. Ikins $ 45,532 $ 115,387 Sheri Robey-Lapan $ 37,564 $ 95,194 Options vest one-third each upon the first, second and third anniversaries of the date of grant, and expire 10 years after the grant date. The option exercise price is 100% of the fair market value on the date of grant. Options are exercisable for a period of 90 days after termination of employment to the extent vested at that time. Amounts represent hypothetical gains that could be achieved if exercised at the end of the option term. The dollar amounts under these columns assume 5% and 10% compounded annual appreciation in the Common Stock from the date the respective options were granted. These calculations and assumed realizable values are required to be disclosed under Securities and Exchange Commission rules and, therefore, are not intended to forecast possible future appreciation of common stock or amounts that may be ultimately realized upon exercise. The Company does not believe this method accurately illustrates the potential value of a stock option.
Options Exercised and Year-End Option Values The following table sets forth certain information regarding the value of exercised and unexercised options held by the Named Executive Officers as of June 30, 2001.
Fiscal Year-End Option Values Shares Number of Shares Value of Unexercised Acquired upon Value Realized Underlying Unexercised In-the-Money Options Exercise of From Exercise Options at June 30, 2001 at June 30, 2001 Name Options of Options Exercisable Unexercisable Exercisable Unexercisable ---- ------------- --------------- -------------------------- -------------------------- C.W. Gilluly - - 1,907,503 - $ 1,239,877 - Charles W. Terry 35,000 $ 56,875 1,065,908 225,500 $ 657,394 $ 146,575 Robin Deal - - 37,000 3,500 $ 18,350 $ 2,275 Deborah W. Ikins - - 145,000 3,500 $ 71,260 $ 2,275 Represents the difference between the exercise price and the market value price on the date of exercise. Represents the difference between the exercise price of the outstanding options and the closing price of the common stock on June 30, 2001, which was $0.75 per share. Options that have an exercise price greater than the fiscal year-end market value are not included in the value calculation.
Stock Option Plan In October 1995, the Board of Directors approved the COMTEX News Network, Inc. 1995 Stock Option Plan, which was approved by shareholders in December 1995. The Plan provides for the issuance of incentive stock options within the meaning of Section 422 of the Internal Revenue Code and non-qualified stock options in order to recruit and retain key employees, consultants and directors. Employment Agreements The Company has an employment contract with Mr. Terry, who was appointed President in August 1994. Under the terms of an agreement dated October 1, 1998, Mr. Terry is employed for a one- year period, subject to renewal at the Company's discretion for two additional one-year terms. Effective October 2001, the agreement was extended for an additional one-year term. The agreement provides that Mr. Terry is to be paid an initial base salary, subject to annual increases in salary commensurate with annual increases awarded to other executive officers of the Company. The base salary for the fiscal year ending June 30, 2002 is $195,000. Mr. Terry is entitled to receive six months severance pay in the event the Company terminates his employment or determines not to renew his employment agreement, unless his termination is for reasons of gross negligence, willful misconduct, the commission of a felony, or a crime of moral turpitude. Mr. Terry is eligible to receive a bonus based upon the achievement of specified annual gross revenue and net income goals, and to participate in the Company's Stock Option Plan. 2001 Compensation for the Chairman Dr. Gilluly, the Company's Chairman, served as Chief Executive Officer until September 1997. The Company has agreed to compensate Dr. Gilluly for his continuing services as Chairman, at the rate of approximately $73,200 for fiscal year 2002. Dr. Gilluly does not have an employment agreement or severance agreement with the Company. In 1995, the Committee granted Dr. Gilluly non-qualified stock options, which are now fully vested, under the 1995 Stock Option Plan to purchase a total of 200,000 shares of the Company's common stock at the fair market value on the date of grant, of which 100,000 options remain unexercised. No subsequent grants of options have been made to Dr. Gilluly. 2001 Compensation for the President and Chief Executive Officer Mr. Terry was appointed President of the Company in August 1994 and was appointed Chief Executive Officer in September 1997. In October 1998, the Company and Mr. Terry renewed a 1994 agreement regarding the terms of Mr. Terry's employment. The 1998 agreement was extended for an additional one-year term in October 2001. Mr. Terry's employment agreement is described in "Executive Compensation - Employment Agreements," above. Mr. Terry's compensation during fiscal year 2001 was determined by the terms of the employment agreement. The Compensation Committee believes that Mr. Terry's employment agreement follows the Company's compensation goals and bases his compensation upon both objective quantitative performance factors (a bonus based upon his meeting annual gross revenue and net income goals) and other non-performance based elements (a base annual salary). Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information as of October 22, 2001 regarding the beneficial ownership of shares of the Company's common stock, par value $.01 per share (the "Common Stock") of (i) each person known to the Company to be the beneficial owner, within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), of more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company named in the Summary Compensation Table (see "Executive Compensation") and (iv) all executive officers and directors of the Company as a group. Unless otherwise indicated, the address of each named beneficial owner is c/o COMTEX News Network, Inc., 4900 Seminary Road, Suite 600, Alexandria, Virginia 22311. Except to the extent indicated in the footnotes, each of the beneficial owners named below has sole voting and investment power with respect to the shares of Common Stock listed. Name and Address of Amount and Nature of Percentage Beneficial Owner Beneficial Ownership of Class -------------------- ------------------------- ----------- AMASYS Corporation 4,693,940 45.1% 4900 Seminary Road, St. 600 Alexandria, VA 22311 C.W. Gilluly, Chairman 4,492,506 36.5% Charles W. Terry, Director, 1,378,408 12.0% President and Chief Executive Officer Erik Hendricks, Director 54,900 * Robert A. Nigro, Director 141,142 1.3% John D. Sanders, Ph.D., Director 92,400 * John Brunette, Director 16,500 * Deborah W. Ikins, 229,118 2.2% Executive Vice President Sheri Robey-Lapan, Vice President 68,024 * Marketing and Corporate Strategy Robin Deal, Vice President, 64,703 * Finance & Accounting All directors and 6,567,701 47.4% executive officers as a group (10 Persons) * Less than 1% Beneficial ownership is direct unless otherwise indicated. Includes 2,540,503 shares of Common Stock which may be acquired by Dr. Gilluly and his wife, Marny (the "Gillulys"), pursuant to a Stock Option Agreement among AMASYS Corporation ("AMASYS"), Pacific Telecommunications Systems, Inc., a wholly owned subsidiary of AMASYS ("PTSI"), and the Gillulys. Includes 1,807,503 shares of Common Stock which may be acquired pursuant to a Stock Option Agreement between the Company and the Gillulys. Also includes 100,000 shares of Common Stock which may be acquired by Dr. Gilluly upon the exercise of vested options granted under the COMTEX News Network, Inc. 1995 Stock Option Plan. Includes 397,733 shares of Common Stock which may be acquired upon the exercise of vested options granted under the COMTEX News Network, Inc. 1995 Stock Option Plan; 676,500 shares of Common Stock which may be acquired upon the exercise of vested options granted per a transfer by Dr. Gilluly of options held by Dr. Gilluly that were previously granted by COMTEX; 10,000 shares of Common Stock held by Mr. Terry's children under the Uniform Gifts to Minors Act; 5,000 shares of Common Stock held by Mr. Terry's mother, as to which Mr. Terry holds dispositive power; and 12,000 shares of Common Stock held by Mr. Terry's wife, as to which he disclaims beneficial ownership. Includes 202,850 shares of Common Stock which may be acquired upon the exercise of vested options granted under the COMTEX News Network, Inc. 1995 Stock Option Plan. Ms. Ikins' employment with the Company terminated on September 18, 2001. Includes 49,900 shares of Common Stock which may be acquired upon the exercise of vested options granted under the COMTEX News Network, Inc. 1995 Stock Option Plan. Includes 29,900 shares of Common Stock which may be acquired upon the exercise of vested options granted under the COMTEX News Network, Inc. 1995 Stock Option Plan. Includes 16,500 shares of Common Stock which may be acquired upon the exercise of vested options granted under the COMTEX News Network, Inc. 1995 Stock Option Plan. Includes 39,900 shares of Common Stock which may be acquired upon the exercise of vested options granted under the COMTEX News Network, Inc. 1995 Stock Option Plan. Includes 43,890 shares of Common Stock which may be acquired upon the exercise of vested options granted under the COMTEX News Network, Inc. 1995 Stock Option Plan. Ms. Robey-Lapan's employment with the Company terminated on August 1, 2001. Includes 52,400 shares of Common Stock which may be acquired upon the exercise of vested options granted under the COMTEX News Network, Inc. 1995 Stock Option Plan and 10,500 shares of Common Stock which may be acquired upon the exercise of vested options granted per a transfer by Dr. Gilluly of options held by Dr. Gilluly that were previously granted by COMTEX. Includes Slawek Ligier, who was appointed Vice President, Chief Technology Officer on January 29, 2001.
Item 13. Certain Relationships and Related Transactions Board of Directors Interlocks and Insider Participation General Dr. Gilluly serves as Chairman of the Board of Directors of the Company. Dr. Gilluly also serves as Chairman and Chief Executive Officer of AMASYS. AMASYS owns 4,693,940, or approximately 45.1%, of the issued and outstanding shares of Common Stock. Of the Common Stock owned by AMASYS, 2,540,503 are subject to option by Dr. Gilluly. Dr. Gilluly and his spouse also directly own options to acquire an additional 1,807,503 shares of the Common Stock. Note Payable to AMASYS In June 1999, the Company executed an amended note to AMASYS to incorporate outstanding interest of approximately $254,000 into the principal amount of the note payable to AMASYS due July 1, 2002. The note bears interest at a rate of 10% on the principal balance of $953,954 at June 30, 2001. Principal payments of $33,000 and approximately $97,000 in interest payments were made to AMASYS during the fiscal year ended June 30, 2001. The Note is collateralized by a continuing interest in all receivables, all products of such receivables and the proceeds thereof, all purchase orders, and all patents and technology now or hereafter held or received by the Company. During August 2001, AMASYS and the Company 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 term 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 the Company. 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. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements Report of Independent Auditors F-1 Balance Sheets at June 30, 2001 and 2000 F-2 Statements of Operations for the fiscal years ended June 30, 2001, 2000, and 1999 F-3 Statements of Stockholders' Equity (Deficit) for the fiscal years ended June 30, 2001, 2000 and 1999 F-4 Statements of Cash Flows for the fiscal years ended June 30, 2001, 2000 and 1999 F-5 Notes to Financial Statements F-6 2. Financial Statement Schedules The schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (b) Reports on Form 8-K None (c) Exhibits 3.1 Restated Certificate of Incorporation of the Company, (incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 2-72408 NY), declared effective on July 22, 1981). 3.2 Certificate of Amendment of Certificate of Incorporation of the Company effective May 14, 1996. (incorporated by reference on Form 10-K dated June 30, 1996). 3.3 Amended and Restated By-Laws of the Company. 10.4 Stock Option Agreement between the Company and C.W. Gilluly and Marny Gilluly, dated May 16, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q dated March 31, 1995). 10.6 Agreement between Infotechnology, Inc. and the Company, dated May 16, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q dated March 31,1995). 10.8 Amended, Consolidated and Restated 10% Senior Subordinated Secured Note, dated May 16, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q Dated March 31, 1995). 10.9 Comtex Scientific Corporation 1995 Stock Option Plan (incorporated by reference to the Company's Proxy Statement dated November 9, 1995). 10.10 Lease Agreement between Plaza IA Associates Limited Partnership and the Company dated April 6, 1996 (incorporated by reference to the Company's Quarterly Report on Form 10-Q dated March 31, 1996). 10.14 Employment Agreement with Charles W. Terry dated July 29, 1994 (incorporated by reference to Company's Form 10-Q dated September 30, 1998). 10.15 First Allonge to Amended, Consolidated and Restated 10% Senior Subordinated Secured Note between the Company and AMASYS Corporation dated as of June 30, 1999 (incorporated by reference to Company's Form 10-K dated June 30, 1999). 10.16 First Amendment to Comtex Scientific Corporation 1995 Stock Option Plan, effective September 15, 1997, dated February 7, 2000. 10.17 Second Amendment to Comtex Scientific Corporation 1995 Stock Option Plan, effective December 2, 1999, dated February 7, 2000. 10.18 Third Amendment to Comtex News Network, Inc. 1995 Stock Option Plan, effective December 7, 2000, dated June 1, 2001. 10.19 Second Amendment to Amended, Consolidated and Restated 10% Senior Subordinated Secured Note between the Company and AMASYS Corporation dated as of August 31, 2001. 23 Consent of Independent Auditors. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 26, 2001 COMTEX NEWS NETWORK, INC. By: /s/ Charles W. Terry By: /s/ Robin Y. Deal Charles W. Terry Robin Y. Deal President and Chief Executive Vice President, Finance & Officer Accounting (Principal Executive Officer) (Principal Financial and Accounting Officer) REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders COMTEX News Network, Inc. We have audited the accompanying balance sheets of COMTEX News Network, Inc. as of June 30, 2001 and 2000 and the related statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended June 30, 2001. 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 financial position of COMTEX News Network, Inc. at June 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP McLean, Virginia August 24, 2001 PAGE> COMTEX NEWS NETWORK, INC. BALANCE SHEETS AT JUNE 30, 2001 2000 ------------- ------------ ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 367,493 $ 1,655,222 Accounts Receivable, Net of Allowance of approximately $554,000 and $314,000 at June 30, 2001 and June 30, 2000, respectively 1,897,983 2,086,701 ------------- ------------ Prepaid Expenses and Other Current Assets 367,112 185,692 TOTAL CURRENT ASSETS 2,632,588 3,927,615 PROPERTY AND EQUIPMENT, NET 3,730,653 1,829,060 DEPOSITS AND OTHER ASSETS 201,802 219,978 ------------- ------------ TOTAL ASSETS $ 6,565,043 $ 5,976,653 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Expenses $ 2,501,834 $ 2,551,775 Note Payable - 60,000 ------------- ------------ TOTAL CURRENT LIABILITIES 2,501,834 2,611,775 LONG-TERM LIABILITIES: Long-Term Note Payable - Affiliate 953,954 986,954 ------------- ------------ TOTAL LONG-TERM LIABILITIES 953,954 986,954 ------------- ------------ TOTAL LIABILITIES 3,455,788 3,598,729 COMMITMENTS AND CONTINGENCIES (Notes 11 and 13) STOCKHOLDERS' EQUITY Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000; Shares issued and outstanding: 10,191,373 and 9,967,897, respectively 101,914 99,679 Additional Capital 11,867,469 11,403,826 Accumulated Deficit (8,860,128) (9,125,581) ------------- ------------ Total Stockholders' Equity 3,109,255 2,377,924 ------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,565,043 $ 5,976,653 ============= ============
The accompanying "Notes to Financial Statements" are an Integral part of these financial statements F-2 COMTEX NEWS NETWORK, INC. STATEMENTS OF OPERATIONS Fiscal Year Ended June 30, 2001 2000 1999 ----------- ------------ ---------- Revenues $16,597,518 $ 12,645,344 $ 7,557,397 Cost of Revenues 4,677,945 3,822,385 2,813,841 ----------- ------------ ---------- Gross Profit 11,919,573 8,822,959 4,743,556 Operating Expenses Technical Operations & Support 3,242,673 2,111,843 928,073 Product Development 605,433 455,834 270,070 Sales and Marketing 2,710,316 2,281,350 1,280,887 General and Administrative 3,962,681 2,422,394 1,617,136 Stock-based Compensation 314,600 - - Depreciation and Amortization 773,672 243,075 105,257 ----------- ------------ ---------- Total Operating Expenses 11,609,375 7,514,496 4,201,423 ----------- ------------ ---------- Operating Income 310,198 1,308,463 542,133 Other income/(expense) Interest Expense (102,698) (106,121) (86,680) Interest Income 68,915 52,586 1,009 Other Income/(Expense) (8,859) (12,987) - ----------- ------------ ---------- Other Expense, net (42,642) (66,522) (85,671) Income Before Income Taxes 267,556 1,241,941 456,462 Income Taxes 2,103 444 441 ----------- ------------ ---------- Net Income $ 265,453 $ 1,241,497 $ 456,021 =========== ============ ========== Basic Earnings Per Common Share $ .03 $ .14 $ .06 =========== ============ ========== Weighted Average Number of Common Shares 10,026,735 9,051,214 7,984,389 =========== ============ ========== Diluted Earnings Per Common Share $ .02 $ .10 $ .04 =========== ============ ========== Weighted Average Number of Shares Assuming Dilution 13,969,090 12,669,045 11,343,804 =========== ============ ==========
The accompanying "Notes to Financial Statements" are an Integral part of these financial statements F-3 COMTEX NEWS NETWORK, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999 Common Shares Outstanding -------------------------- Total Number of Par Additional Accumulated Stockholders' Shares Value Capital Deficit Equity/(Deficit) ---------- ---------- ----------- -------------- --------------- Balance at June 30, 1998 7,896,231 $ 78,962 $ 9,987,098 $ (10,823,099) $ (757,039) Exercise of Stock Options 154,492 1,545 18,995 20,540 Issuance of Stock - ESPP 73,707 737 25,708 26,445 Net Income 456,021 456,021 ---------- ---------- ----------- -------------- --------------- Balance at June 30, 1999 8,124,430 81,244 10,031,801 (10,367,078) (254,033) Exercise of Stock Options 524,647 5,247 75,043 80,290 Issuance of Stock - ESPP 18,820 188 47,243 47,431 Private Placement Shares 1,300,000 13,000 1,249,739 1,262,739 Net Income 1,241,497 1,241,497 ---------- ---------- ----------- -------------- --------------- 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 ========== ========== =========== ============== ===============
The accompanying "Notes to Financial Statements" are an Integral part of these financial statements F-4 COMTEX NEWS NETWORK, INC. STATEMENTS OF CASH FLOWS Fiscal Year Ended June 30, ----------------------------------------- 2001 2000 1999 ----------- ------------ ---------- Cash Flows from Operating Activities: Net Income $ 265,453 $ 1,241,497 $ 456,021 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and Amortization Expense 773,672 243,075 105,256 Bad Debt Expense 823,850 225,500 349,045 Stock-based compensation 314,600 - - Loss on disposal of assets 8,859 166,238 - Changes in Assets and Liabilities: Accounts Receivable (635,132) (971,864) (807,380) Prepaid Expenses and Other Current Assets (181,420) (113,030) (53,150) Deposits and Other Assets 18,176 (165,786) 250 Accounts Payable and Accrued Expenses (49,941) 977,171 565,208 ----------- ------------ ---------- Net Cash provided by Operating Activities 1,338,117 1,602,801 615,250 Cash Flows from Investing Activities: Purchases of Property and Equipment (2,684,124) (1,395,772) (642,708) Proceeds from Disposal of Assets - 2,450 - ----------- ------------ ---------- Net Cash used in Investing Activities (2,684,124) (1,393,322) (642,708) Cash Flows from Financing Activities: Proceeds from Notes Payable - - - Repayments on Notes Payable (93,000) (40,000) (94,660) Proceeds from Issuance of Stock - Private Placement - 1,262,739 - Proceeds from Issuance of Stock - Employee Stock Purchase Plan 87,362 47,431 26,445 Proceeds from Exercise of Stock Options 63,916 80,290 20,540 ----------- ------------ ---------- Net Cash provided by (used in) Financing Activities 58,278 1,350,460 (47,675) ----------- ------------ ---------- Net Increase (decrease) in Cash and Cash Equivalents (1,287,729) 1,559,939 (75,133) Cash and Cash Equivalents at Beginning of Period 1,655,222 95,283 170,416 ----------- ------------ ---------- Cash and Cash Equivalents at End of Period $ 367,493 $ 1,655,222 $ 95,283 ========== ============ ==========
The accompanying "Notes to Financial Statements" are an Integral part of these financial statements F-5 COMTEX NEWS NETWORK, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 1. THE COMPANY COMTEX News Network, Inc. (the "Company" or "COMTEX") is a leading business-to-business "infomediary" providing real-time news content to business information retailers serving the financial services, individual and institutional investor, wireless and corporate information markets. We employ internally developed technology to aggregate and process an average of 20,000 full news stories a day from over 70 content sources. We aggregate the information to create and deliver real-time, subject-specific headline, summary and full story news and information products. Our network of distributors includes over one thousand web sites and corporate information applications that benefit from receiving up-to-the-minute information delivered in an industry standard format, enhanced with keywords, metadata, stock ticker symbols and organized by subject. Our news products are read by millions of end- users. Consistent with standard practice in the information aggregation industry, the Company generally has renewable long-term contractual relationships with those information providers and information distributors with which it does business. These information services contracts typically provide for both minimum fees and royalties based upon expected and achieved volumes of usage. Fees and royalties from information distributors comprise the majority of the Company's revenues. Data communications revenues represent the contractual charges for delivering the information over various media. 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 4,693,940 (approximately 46%) of the issued and outstanding shares of the Company. Of the Company's common stock owned by AMASYS, 2,540,503 shares are subject to option by C.W. Gilluly, Ed.D., the Chairman of the Board of Directors of both the Company and AMASYS. Dr. Gilluly and his spouse, Marny Gilluly, (the "Gillulys") also directly own options to acquire an additional 1,804,003 shares of the Company's common stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with maturity dates of 90 days or less at the time of purchase to be cash equivalents. Revenue Recognition Information services revenues are recognized as services are rendered based on contractual terms such as usage, fixed fee, percentage of distributor revenues or other pricing models. Effective April 1, 2001, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. Previously, the Company recognized revenue for start- up fees upon execution of a contract for content services. The Company routinely completed implementation of its content feed to the customer at the time of execution. Under the new accounting method adopted, the Company now defers start-up fee revenues over the initial term of the contract. The cumulative effect of the change was not material to the financial statements of the Company. Data communications revenues are recognized in accordance with contract terms as costs are incurred. Amounts received in advance are deferred and recognized over the service period. Research and Development The Company conducts ongoing research and development in the areas of product enhancement and quality assurance. Such costs are expensed as incurred. Costs for fiscal years 2001, 2000 and 1999 were approximately $605,000, $456,000 and $270,000, respectively. Property and Equipment Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred and the cost of renewals and betterments are capitalized. Depreciation and amortization are computed using the straight- line method over the estimated lives of the related assets - five years for furniture and fixtures, computer equipment and software development and three years for purchased software. Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful lives of the related assets. Upon retirement or sale, the cost and related accumulated depreciation or amortization of assets are removed from the accounts and any resulting gain or loss is included in the determination of net income. Software for Internal Use The Company has adopted the provisions of Statement of Position No. 98-1 (SOP 98-1) Accounting for the Costs of Computer Software for Internal Use. SOP 98-1 requires the capitalization of certain costs incurred in the development process. Capitalized costs consist of certain external direct costs of third party software integrated into the Company's product, development services performed by consultants and payroll costs for employees who are directly associated with the development process. Income Taxes Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. Stock Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of the grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, recognizes no compensation expense for the stock option grants under the Stock Option Plan. Risks and Uncertainties Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company periodically performs credit evaluations of its customers' financial condition and generally does not require collateral on accounts receivable. As of June 30, 2001 and 2000, none of the Company's customers accounted for 10% or more of gross revenues. The Company maintains reserves on accounts receivable and to date credit losses, in the aggregate, have not exceeded management's expectations. Earnings per Common Share Basic earnings per share ("EPS") is calculated by dividing net earnings available to common shares by weighted average common shares outstanding. Diluted EPS is calculated similarly, except that it includes the dilutive effect of the assumed exercise of stock options. Fair Value of Financial Instruments Accounts receivable, accounts payable, accrued expenses and other current assets and liabilities are carried at amounts which reasonably approximate their fair values because of the relatively short maturity of those instruments. It is not practical to estimate the fair value of the Company's Long-term Note Payable to Affiliate due to its unique nature. Recent Pronouncements In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133, which was implemented in fiscal year 2001. The adoption of SFAS No. 133, as amended, did not have a significant effect on the Company's financial statements. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. Application of the non-amortization provisions of the Statement is not expected to result in a material change in net income. If necessary, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of July 1, 2002, and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. Reclassifications Certain fiscal year 2000 and 1999 amounts have been reclassified to conform to the fiscal year 2001 presentation. 3. RELATED PARTY TRANSACTIONS Note Payable to AMASYS In June 1999, the Company executed an amended Note to AMASYS to incorporate outstanding interest of approximately $254,000 into the principal amount of the note payable to AMASYS due July 1, 2002. The Note bears interest at a rate of 10% on the principal balance of $953,954 at June 30, 2001. Principal payments of $33,000 were made during fiscal year 2001 on the balance of $986,954 at June 30, 2000. The Note is collateralized by a continuing interest in all receivables, all products of such receivables and the proceeds thereof, all purchase orders, and all patents and technology now or hereafter held or received by the Company. Approximately $97,000, $105,000 and $28,000 in interest was paid to AMASYS during the fiscal years ended June 30, 2001, 2000 and 1999, respectively. During August 2001, AMASYS and COMTEX signed an amendment to the Note Payable to AMASYS, (Second Amendment to Amended, Consolidated and Restated 10% Senior Subordinated Secured Note) (the "Amended Note") extending the term 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. Stock Option Transfer During fiscal year 2001, the Gillulys transferred 242,000 of their stock options, which are fully exercisable at $0.10 per share, to certain members of management. This transfer resulted in compensation expense to the Company of $314,600. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at June 30: 2001 2000 ------------- --------------- Computer Equipment $ 2,656,134 $ 1,361,937 Furniture and Fixtures 435,816 178,679 Software and Software Development 2,258,897 1,291,898 Leasehold Improvements 183,204 38,722 Other Equipment 14,064 14,064 ------------- --------------- 5,548,115 2,885,300 Less Accum. Depreciation & Amort. (1,817,462) (1,056,240) ------------- --------------- Net $ 3,730,653 $ 1,829,060 ============= ===============
Depreciation expense for the fiscal years ended June 30, 2001, 2000 and 1999 was $432,000 $136,000 and $93,000, respectively. Amortization expense was $342,000, $107,000 and $12,000 for the fiscal years ended June 30, 2001, 2000 and 1999, respectively. 5. NOTES PAYABLE Notes payable consisted of the following at June 30: 2001 2000 --------- ---------- Note Payable to Century National Bank $ - $ 60,000 Less Current Portion - 60,000 --------- ---------- Total Long-Term Notes Payable $ - $ - ========= ==========
Approximately $2,000, $7,000 and $18,000 in interest was paid to Century National Bank during the fiscal years ended June 30, 2001, 2000 and 1999, respectively. In September 1997, the Company obtained a $50,000 line of credit and a $140,000 three year term loan from Century National Bank with annual principal repayments of $40,000, $40,000 and $60,000 due September 1998, September 1999 and September 2000, respectively. Both facilities were guaranteed by C.W. Gilluly, Ed.D. The line of credit facility was renewed for one year in December 1998. In May 1999, the line of credit was increased to $250,000 bearing interest at a rate of prime plus one percent annually (8.75% at June 30, 1999). The Company opted not to renew the line of credit at the end of its one-year term. The term note bore interest at a rate of prime plus two percent annually and was paid in full as of September 2000. In June 2001, the Company obtained a $500,000 line of credit with Century National Bank. The line of credit is collateralized by a security interest in all inventory, chattel paper, accounts, equipment and general intangibles. The line of credit bears interest at the Prime Rate and expires June 29, 2002. The Company is subject to certain financial covenants pursuant to the line of credit, including working capital, cash flow coverage, debt service coverage and tangible net worth requirements. At June 30, 2001, the Company was in compliance with all debt covenants. 6. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Fiscal Year Ended June 30, 2001 2000 1999 ------------ ----------- ----------- Numerator: Net Income $ 265,453 $ 1,241,497 $ 456,021 ============ =========== =========== Denominator: Denominator for basic earnings per share - weighted average shares 10,026,735 9,051,214 7,984,389 Effect of dilutive securities: Stock Options 3,942,355 3,617,831 3,359,415 ------------ ----------- ----------- Denominator for diluted earnings per share 13,969,090 12,669,045 11,343,804 ============ =========== =========== Basic Earnings Per Share $ .03 $ .14 $ .06 Diluted Earnings Per Share $ .02 $ .10 $ .04
7. INCOME TAXES Income taxes included in the Statements of Operations consist principally of state income taxes and local franchise taxes. The tax provision for continuing operations differs from the amounts computed using the statutory federal income tax rate as follows: 2001 2000 1999 ------- ----- ------ 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, 2001 2000 ---------- ---------- Deferred tax assets: Net operating loss carryforwards - Operations $ 608,771 $ 728,859 Net operating loss carryforwards - NQSOs 144,484 128,904 Amortization 26,167 26,167 Allowance for bad debts 210,480 119,446 Options to Executives 129,808 - Accrued vacation, bonus and commissions 59,776 169,413 Note receivable reserve 34,132 34,132 Alternative minimum tax credit carryforward 19,865 19,865 Deferred revenue and charitable contributions 4,887 - ---------- ---------- Total deferred tax assets 1,238,370 1,226,786 Deferred tax liabilities: Depreciation (137,070) (19,876) ---------- ---------- Total deferred tax liabilities (137,070) (19,876) ---------- ---------- Deferred tax assets less liabilities 1,101,300 1,206,910 Less: Valuation Allowance (1,101,300) (1,206,910) Net deferred tax asset (liability) $ - $ - =========== ===========
The Company has net operating loss (NOL) and business tax credit carryforwards available to offset future taxable income of approximately $2,000,000 as of June 30, 2001. The net change in valuation allowance during 2001 was a decrease of approximately $106,000. These NOL and ITC carryforwards expire beginning in the year 2002. 8. STOCK OPTION PLAN The Company's 1995 Stock Option Plan (the "1995 Plan") provides for both incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and non-qualified stock options to purchase shares by key employees, consultants and directors of the Company. The Company has 3,901,935 shares reserved for issuance under the 1995 Plan as of June 30, 2001, 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). Information with respect to stock options under the 1995 Plan is as follows: 2001 2000 1999 ------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------------------------------------------------------------ Outstanding at beginning of year 1,633,805 $ 0.84 1,767,583 $ 0.25 1,554,412 $ 0.14 Granted 717,125 2.45 548,500 2.17 398,000 0.62 Exercised ( 134,180) 0.48 ( 514,147) 0.15 ( 154,492) 0.13 Expired/ Forfeited (252,660) 2.90 (168,131) 1.02 (30,337) 0.26 ----------- ---------- ---------- Outstanding at end of year 1,964,090 1.19 1,633,805 0.84 1,767,583 0.25 =========== ========== ========== Options exercisable at year-end 1,208,700 0.52 1,119,353 0.30 1,417,718 0.18 Weighted average fair value of options granted $ 1.98 $ 1.80 $ 0.62
The following table summarizes information about the stock options outstanding at June 30, 2001: Outstanding Exercisable ------------------------------------------------------ -------------------------- Weighted- Weighted- Average Weighted- Exercise Number of Average Remaining Average Price Shares Exercise Contractual Number of Exercise Price Life (years) Shares Price ------------------------------------------------------ -------------------------- $ 0.10-0.36 992,475 $ 0.18 5.44 992,475 $ 0.18 $ 1.05-1.97 404,125 $ 1.70 9.16 70,640 $ 1.51 $ 2.05-4.88 567,490 $ 2.59 8.87 145,585 $ 2.38 --------- --------- 1,964,090 1,208,700
The Company has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for the Company's stock option plan been determined based upon the fair value at the grant date for awards under the plan consistent with the methodology prescribed under SFAS No. 123, the Company's net income/(loss) in fiscal years 2001, 2000 and 1999 would have been approximately $(45,016), $1,052,000 and $328,000, or $ .00, $ .12 and $ .04 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing fair value model. The following weighted-average assumptions were used for grants: dividend yield of 0%; expected volatility of 1.10 to 1.56; expected life of the option term of 5 years and risk-free interest rate of 4.82% to 6.22%. 9. EMPLOYEE STOCK PURCHASE PLAN In December 1997, stockholders approved the 1997 Employee Stock Purchase Plan. The purpose of the Plan is to secure for the Company and its stockholders the benefits of the incentive inherent in the ownership of Common Stock by present and future employees of the Company. The Plan is intended to comply with the terms of Section 423 of the Internal Revenue Code of 1986, as amended, and Rule 16b-3 of the Securities Exchange Act of 1934. Under the terms of the Plan individual employees may pay up to $10,000 for the purchase of the Company's common shares at 85% of the determined market price. 10. SUPPLEMENTARY INFORMATION Income Statement The following income statement items were charged to costs and expenses: Fiscal Year Ended June 30, 2001 2000 1999 ----------- ----------- -------------- Maintenance and Repairs $ 150,878 $ 96,685 $ 48,355 Advertising and Promotion Costs 369,522 241,437 74,033 Royalties 4,257,494 3,205,744 2,014,141
Allowance for Doubtful Accounts The following table summarizes activity in the allowance for doubtful accounts: Fiscal Year Ended June 30, -------------------------- 2001 2000 1999 ----------- ---------- ----------- Beginning Balance $ 314,331 $ 350,868 $ 66,916 Additions 823,850 225,500 349,045 Write-Offs (584,285) (262,037) (65,093) ----------- ----------- ------------ Balance at End of Year $ 553,896 $ 314,331 $ 350,868 =========== =========== ============
11. COMMITMENTS AND CONTINGENCIES The Company leases office space under noncancelable operating leases that expire beginning August 31, 2002. The leases require fixed escalations and payment of property taxes, insurance and maintenance costs. The future minimum rental commitments under operating leases are as follows: Fiscal year ending Minimum Rental ending June 30, Commitments ------------------- ------------------ 2002 561,197 2003 234,306 2004 28,492 2005 and beyond - ------------------ $ 823,995 ================== Rent expense under all operating leases totaled approximately $554,000, $278,000 and $192,000 for the fiscal years ended June 30, 2001, 2000 and 1999, respectively. The Company has filed a collection action against 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 defendant corporation filed an Answer and Counterclaim alleging COMTEX breached its agreement and seeks damages of $1,000,000 for lost business, loss of reputation and good will. The Company intends to vigorously defend itself against the allegations in the counterclaim. 12. 401(K) PLAN The Company has a 401(k) plan available to all full-time employees who meet a minimum service requirement. Employee contributions are voluntary and are determined on an individual basis with a maximum annual amount equal to the maximum amount allowable under federal tax regulations. All participants are fully vested in their contributions. The 401(k) plan provides for discretionary Company contributions. The Company did not make any contributions during the fiscal years ended June 30, 2001, 2000 and 1999. 13. SUBSEQUENT EVENTS The Company was named as a defendant in a lawsuit filed in the United States District Court for the Northern District of Alabama, Northeastern Division on August 25, 2000. The suit was captioned Clyde Collins Pearson (the "Plaintiff") Individually and In His Capacity As Representative of the Class of Emulex Corporation Shareholders Similarly Situated v. Internet Wire, Inc.; Comtex News Network, Inc.; and Emulex Corporation. The suit related to Plaintiff's sale of Emulex Corporation stock in response to a false news release disseminated by or on behalf of various defendants, including the Company. The complaint alleged that the defendants failed to take reasonably necessary precautions to prevent the distribution of the false press release attributed to Emulex. Plaintiff sought $120,000 in actual damages, and additional punitive damages. The Company filed a motion to dismiss the complaint, which was granted by the Court and the case was dismissed July 5, 2001. The time for filing a notice of appeal has since expired. 14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended June 30, 2001 and 2000. The results for the quarter ended September 30, 2000 reflect an adjustment related to stock-based compensation, which was not included in Form 10-Q for that period. Quarter Ended: ---------------------------------------------------- September 30, December 31, March 31, June 30, 2000 2000 2001 2001 ------------ ------------- ----------- ----------- Revenues $ 4,161,097 $ 4,324,648 $ 4,306,391 $ 3,805,382 Gross Profit 3,000,876 3,168,716 3,134,803 2,615,178 Net Income/(Loss) 173,191 112,388 70,179 (90,305) Net Income/(Loss) per share, basic $ 0.02 $ 0.01 $ 0.01 $ (0.01) Shares used in per share calculation, basic 9,968,150 9,982,881 10,062,307 10,093,602 Net Income per share, diluted $ 0.01 $ 0.01 $ 0.01 $ (0.01) Shares used in per share calculation, diluted 13,785,500 13,814,914 14,062,685 14,213,260
Quarter Ended: ---------------------------------------------------- September 30, December 31, March 31, June 30, 1999 1999 2000 2000 ------------ ------------- ----------- ---------- Revenues $ 2,408,894 $ 2,900,551 $ 3,369,881 $ 3,966,018 Gross Profit 1,599,316 1,967,883 2,402,601 2,853,159 Net Income 276,865 265,590 317,094 381,948 Net Income per share basic $ 0.03 $ 0.03 $ 0.03 $ 0.04 Shares used in per share calculation, basic 8,125,102 8,457,025 9,728,062 9,894,667 Net Income per share, diluted $ 0.02 $ 0.02 $ 0.02 $ 0.03 Shares used in per share calculation, diluted 12,100,225 12,329,142 13,015,757 13,231,056