-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GS9rFUV/KIKQYvG9g5p91YB8SMzRX0Y61IvUZTenQHVXK2bfJVMZbj7tnmv5TGg1 K2ZGr0q8OzogfLkq2/muKQ== 0000352988-02-000016.txt : 20020930 0000352988-02-000016.hdr.sgml : 20020930 20020930144424 ACCESSION NUMBER: 0000352988-02-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMTEX NEWS NETWORK INC CENTRAL INDEX KEY: 0000352988 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 133055012 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10541 FILM NUMBER: 02776336 BUSINESS ADDRESS: STREET 1: 4900 SEMINARY RD STE 600 CITY: ALEXANDRIA STATE: VA ZIP: 22311 BUSINESS PHONE: 703-820-2000 MAIL ADDRESS: STREET 1: 4900 SEMINARY RD STREET 2: SUITE 600 CITY: ALEXANDRIA STATE: VA ZIP: 22311 FORMER COMPANY: FORMER CONFORMED NAME: COMTEX SCIENTIFIC CORP DATE OF NAME CHANGE: 19920703 10-K 1 s10k02c.txt ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JUNE 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-K (Mark One) X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 2002; or ___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-10541 COMTEX NEWS NETWORK, INC. (Exact name of registrant as specified in its charter) New York 13-3055012__ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4900 Seminary Road, Suite 600, Alexandria, Virginia 22311 (Address of principal executive office) Registrant's telephone number, including area code: (703) 820-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X As of September 20, 2002, the aggregate market value of the common stock held by non-affiliates of the Registrant (based upon the last reported sale price of the common stock as reported by the National Association of Securities Dealers Inc. through its Electronic OTC Bulletin Board) was approximately $1,127,265. As of September 20, 2002, 13,140,893 shares of the Common Stock of the Registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required in response to Part III of Form 10-K is hereby incorporated by reference to the specified portions of the registrant's Proxy Statement to be filed within 120 days of the end of the fiscal year ended June 30, 2002. PART I This section should be read in conjunction with the financial statements and notes thereto included elsewhere in this annual report on Form 10-K. Except for the historical information contained herein, the matters discussed in this 10-K include forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. These forward- looking statements may be identified by reference to a future period or by use of forward-looking terminology such as "anticipate," "expect," "could," "may" or other words of a similar nature. Forward-looking statements, which we believe to be reasonable and are made in good faith, are subject to certain risks and uncertainties, including, but not limited to, those set forth under "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS." These risks could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on our behalf. Item 1. Business Overview We are a leading business-to-business "infomediary" providing real-time news content from our worldwide network of news publishers to our network of business information retailers, or distributors, serving the financial services, individual and institutional investor, wireless and corporate information markets. We employ internally developed technology to process, generally in less than 5 seconds, more than 20,000 real-time news stories each day from approximately 70 newswire services and other publishers. Our unique and uniform processing allows our customers to more effectively select and utilize the content in their products and services. Processing includes, for each news story, conversion to NewsML, an industry standard format, and indexing by category, keyword and ticker symbol. Illustrated chart entitled, "COMTEX: Creating Value by Connecting Two Powerful Networks" This chart shows (1) publishers deliver content to COMTEX; (2) COMTEX provides one relationship, one business model, one cotnractual agreement and one data link to these publishers;(3) COMTEX delivers integrated, enhanced, aggregated real-time news to its client base of distributors through one relationship, in one format and one technical contact. Our network of distributors includes over one thousand information applications and web sites that require up-to-the- minute information to meet the needs of their end-users and customers. Our news stories, through these applications, reach an audience of millions of end-users each month. We license our news products to our distributors based upon the economics of their business models. Our distributors are responsible for developing their information applications and the sales and marketing of their respective direct distribution channels. We typically share in the revenues generated from the distributors' sales and marketing investments. We then pay a portion of our content-related revenue to our publisher suppliers. Our Partners Network of Distributors. Our distributor partners integrate our products into their content-based applications to provide their end-users with relevant, timely and comprehensive global business, economic and general news coverage. Our content products, tailored to our distributors' specifications and market requirements, are designed to contribute to the success of their business models. Contract terms with our distributors generally range from one to three years. Our revenues are generated through various models including fixed fee, royalty minimums and variable royalties based on the growth and success of the distributor's business model. We offer a variety of delivery options including the Internet through file transfer protocol (FTP) and virtual private networks (VPN), as well as various high-speed technologies including leased line and frame relay. No individual distributor provides more than 10% of our revenue. Our distributor partners gain cost advantages by using us as a single-source provider. As depicted in the chart above, they gain access to only the content they need from approximately 70 news publishers with a single contract and royalty model, one technical format to integrate and tagged with our standardized metadata. Content is licensed on a topical or geographical basis, making it more cost effective for distributors since they pay only for the specific content that impacts their target audience. Some of our current distributors include: O Bloomberg O CBS Marketwatch O Dialog O Factiva O OneSource Information Services O Screaming Media Inc./Stockpoint O S&P Comstock O Track Data O Zacks Investment Research Network of Publishers. Our newswire services and other content providers supply us with the information that is the foundation of our product offerings. Each of our content providers generally offers a single editorial perspective and area of coverage, which we aggregate with other providers' content to create real-time and value-added topical news feeds for our distributors. This content includes: O Late-breaking domestic and international economic and political news; O Financial and business news; O Company information, press releases and stock quotes and charts; and O Sports and entertainment news. Through our network of distributors, our content providers earn new revenue streams, reach millions of end-users, gain rapid access to new markets and increase brand exposure. Our content providers are able to significantly expand their reach, while our distributors avoid the work and expense of aggregating content in diverse formats from multiple sources. Further, our licensing procedures address content providers' concerns over unauthorized distribution and publishing. Our royalty model is highly attractive to our content providers since it is based upon their content's contribution to our products and the corresponding revenues from our customers, which is unlike traditional models where royalties are limited to only those generated from actual use of the publishers' content by the end-user. Contract terms with our content providers generally range from one to three years and include the non-exclusive right to license their content in our products to re-sellers and other information distributors. This negotiated right is a significant asset since it allows us to generate revenue based on the extended end-user reach and business models of each of our distributors, instead of depending upon the costly pursuit and monetization of individual readers. In addition, the distributors' marketing expenditures and product investments generally enhance our revenues, and therefore our publishers' royalties, without additional cost or effort. Costs associated with these licenses include fixed fees, royalty minimums and/or variable royalties paid to content providers based on our information services revenue. Some of our current providers include the following: O The Associated Press O Business Wire O EDGAR Online O Knight-Ridder/Tribune O PBI Media Inc. O PR Newswire O United Press International We also have agreements with a significant number of internationally based news agencies including the following: O AllAfrica, Inc. O Asia Pulse O Australasian Business Intelligence Abstracts (ABIX) O AFX News O Business News Americas, Ltda. O EFE News Service O Europa Press Internet O Xinhua Technology During the 2000 fiscal year and the beginning of the 2001 fiscal year, we created and implemented Equinox, a real-time content processing system designed to process and enhance more than 100,000 real-time stories per day. Equinox provides improved quality, reliability, packaging and, ultimately, usability of our content. As electronic submissions of news and information are received, Equinox converts each story into a common data format; applies standardized document coding, or metadata; assigns relevant keywords from our proprietary taxonomy; and assigns ticker symbols of any public companies mentioned in the story. The metadata allows our customers to accurately and efficiently direct the right content to the right users at the right time. After the content processing has been completed, the system sorts each news story into topic-defined product categories. All content is processed and then distributed in real-time (generally under 5 seconds without human intervention) to our customers via XML or other specified format. Equinox was designed to provide for the ongoing creation of new topical products, standardized metadata and other content enhancements without significantly impacting processing time or requiring considerable development resources. Thus, we can add new publishers and create new products from existing content sources with minimal additional investment or ongoing cost. Backup and redundancy investments in fiscal 2002, including additional hardware and collocation facilities, have improved the reliability of our system and minimized the risk of catastrophic system or utility provider failures. The News Solutions (R) product, an alternative to streaming content delivery, provides our customers with the ability to implement news-based applications with no content hosting on their part and little or no development effort. News Solutions now provides the ability to access and select content by product, category, keyword, ticker symbol and/or full text search and offers alerting services to end-users. News Solutions has also been enhanced with a variety of formats and options such as the display of 20-minute delayed stock quotes, price charts and research information for each public company identified in a news story. Customers, Sales and Marketing Our customers include business and consumer online services, personal investor web sites, general information web sites, Wall Street stock quote vendors, electronic clipping services and wireless information services who create online products and services using our content. These information services then market these products and services to end-user markets, business users and corporations. These end-users use our customers' services for market research, business intelligence, investment analysis and entertainment. Our marketing strategy is to provide content and content infrastructure to our customers who make their own investments in product development and marketing. In this way, we increase the value of our publishers' content with the investments of our distributors. Our combined abilities deliver the right content to the right reader at the right time. As a result, our news content is exposed to a highly qualified audience of millions of readers. Our sales force is focused on selling to and supporting our distributors in four primary markets in the United States and Europe, including professional investors, individual investors, Internet and corporate information services. The sales force receives a base salary and earns commissions on both new customers and revenue growth from existing customers. Our total compensation plan is consistent with industry compensation practices. Product and Service Offerings The core products currently include a series of topic- defined real-time news products marketed under the brand name CustomWires (R), editorially selected top news products under the brand name COMTEX Newsroom (R) and complete publisher offerings known as full feeds. These products may be delivered as a real- time XML (or other format) streaming feed or imbedded in the customers' browser-based application via our hosted delivery application system, News Solutions (R). We also recently added an alerting application available to our distributors, known as The Ping (Tm). Each of these services is described in more detail below. CustomWires (R) CustomWires are topic-defined newswires that contain only topic-relevant stories from more than 20,000 stories daily, from approximately 70 publishing providers. Stories are selected by automated editorial software according to the significance of the story's content relative to specific CustomWires topics. We offer twenty-six topics under the CustomWires brand name: O Bonds O Healthcare O Business O International O Community O Market Beat O Daily Beat O Olympic Beat O Energy O Petroleum O Enterprise Content Management O Pharmaceuticals O Environment O Public Companies O Equity Analysis O Securities Exchange Commission O Finance O Spanish Select O Foreign Business O Sports O Foreign Exchange O Technology O French Select O Wall Street O Government O World Affairs We also offer an additional eleven geographical CustomWires focusing on specific international regions. COMTEX Newsroom (R) Our Newsroom products consist of editorially selected top news stories in twelve categories. A broad range of news story options includes financial markets, industries, general market and world news. Our editors are skilled at evaluating incoming news feeds for items that will directly affect business and investment decisions in a variety of markets. This expertise ensures that our customers receive relevant and compelling content. The COMTEX Newsroom, Top Headlines, Front Page, Financial Updates, Industry Updates and Personal Finance products are designed to satisfy distributors interested in reaching a broad audience of business end-users. Top Headlines. Top Headlines is an editorial service that selects up to five of the most significant news stories of the day in each of twelve topic-based CustomWires, including: O Business O Community O Energy O Entertainment O Environment O Finance O Government O Healthcare O Internet O International O Sports O Technology These stories are delivered five times every weekday. In addition, International, Government, Business, Finance, Community and Sports are updated once a day on Saturday and Sunday. Front Page. Front Page is designed to reflect the front page of major U.S. newspapers. Our editors select the day's top ten news stories highlighting key global news, which is delivered five times every weekday and once a day on weekends. Financial Updates. Financial Updates keep businesses informed of the financial market. Our editors deliver the most relevant financial information from leading financial information sources twice every weekday. They also provide the basic overview, productivity and analysis for international and U.S. stock markets and the global bond and fund markets and also monitor key company mergers, acquisitions, stock buyouts, hostile takeovers and all economic indicator announcements and data releases. Industry Updates. Industry Updates provide competitive information by industry. Our editors select the top seven to ten stories from each industry category and distribute them to customers once a day on weekdays. These categories include vertical industries such as Airlines, Automobile, Banking, Hardware, Insurance, Oil, Publishing, Telecommunications and Utilities. Personal Finance. Personal Finance highlights personal investment opportunities, banking, insurance, financial planning, and financial security. Editors select five to seven stories daily on weekdays, from well-known financial providers, to deliver relevant information on stock tracking, credit maintenance, taxes, home mortgage, online banking and a host of other specific topics devised to meet the needs of the individual investor. Publisher Full Feeds Our full feed delivery from a specific publisher provides customers with the complete content offering from that publisher. The content is delivered with our electronically enhanced metadata, ticker symbols and standardized keywords, allowing the customer to find the most relevant stories and use the content in conjunction with other COMTEX content. Our full feed distribution offers the same sole source provider benefits as the CustomWires: O conversion of publisher's content into NewsML, the standard electronic format designed to enhance and facilitate the integration of news content; O addition of keywords, product codes, and ticker symbols designed to increase usage of publisher's content; O one integration effort for multiple publishers; and O 24 by 7 monitoring by our technical staff of the publisher's content News Solutions (R) During fiscal year 2001, we launched News Solutions, a suite of browser-based news applications that customers can integrate directly into their web site, intranet or extranet by inserting a few lines of News Solutions-generated HTML compatible code. We host all the content, the customer sets the content selection criteria and the end-users see the intended real-time content. News Solutions customers determine the specific news required for their application from any of our product lines and place the content on their site with little programming effort. News Solutions implementation allows customers to maintain the look and feel of their own web sites and refine the news categories to display only the news that meets their needs. The Ping (Tm) The Ping is a real-time news alerting application that delivers breaking news and critical stories based on our distributors' end-users' specifications. End-users can visit the distributor's site and set-up personal alerts on topics of interest to them to be delivered to their email or mobile devices. The Ping also delivers breaking news in four categories - - general, business, entertainment and sports. Ticker symbols can also be used as the basis for real-time alerts on specific company announcements and news from a larger pool of content. Product Development Product development activities include quality assurance, content product enhancements and the development of proprietary news products. For the years ended June 30, 2002, 2001 and 2000 our product development costs were approximately $363,000, $605,000 and $456,000, respectively. Expenses related to the design and development of our content processing systems are not included in these costs. In fiscal year 2002 the decrease in costs resulted primarily from a reduction in personnel. During fiscal years 2000 and 2001, we made significant investments in product development infrastructure and development of new products, as well as additional quality assurance activities. Competition Our competitors include Internet-focused aggregators and distributors of content, individual national and international electronic news and information services, and traditional content providers seeking new markets for their content via direct relationships with distributors. Our competition with these providers is differentiated by the diversity of content, technology solutions, pricing models offered and other "one stop shop" advantages. Employees At September 20, 2002, we had approximately 46 full-time employees. The employees are not members of a union and we believe employee relations are generally good. Available Information We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800- SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's Web site at "http://www.sec.gov." Item 2. Properties We own no real estate. We lease office space at 4900 Seminary Road in Alexandria, Virginia. We currently occupy approximately 24,000 square feet at an annual rental of approximately $600,000. The lease agreement on approximately 7,000 square feet expires in August 2003. The lease on the remaining space of approximately 17,000 square feet expires in August 2008. In addition, our subsidiary, nFactory COMTEX, S.L., leases shared space in Madrid, Spain at a cost of approximately $1,700 per month. This lease expires in December 2002. Item 3. Legal Proceedings On July 17, 2001, we filed a breach of contract action against Infospace, Inc., a former customer, in the United States District Court for the Eastern District of Virginia for payments owed under contracts with the defendant corporation. The suit is captioned Comtex News Network, Inc. v. Infospace, Inc. Case Number CV01-1108-A. On August 13, 2001, Infospace filed an Answer and Counterclaim alleging that Comtex breached its agreement and sought damages for lost business, loss of reputation and good will. On March 11, 2002, the court rendered a directed verdict in favor of Infospace on the breach of contract claim and Infospace withdrew the counterclaim without prejudice. Infospace also filed a petition with the court for reimbursement of attorneys' fees and costs. On April 9, 2002, we filed a Notice of Appeal to reverse the lower court decision. The case is now fully briefed before the United States Court of Appeals for the Fourth Circuit and we expect a ruling sometime in early 2003. While the appeal was pending, the court, on August 13, 2002, issued an order awarding attorneys' fees of approximately $393,000 to Infospace with costs still to be determined. We intend to seek a stay of this award pending a ruling on the appeal. If we prevail on the appeal, the award of attorneys' fees would likely be reversed. Infospace also has petitioned the court to require us to reimburse Infospace for approximately $201,000 in costs. This petition is still pending before the court. We have recorded an accrual in the year ended June 30, 2002, to provide for the estimated exposure upon resolution of this matter. We are also involved in routine legal proceedings occurring in the ordinary course of business, which in the aggregate are believed by management to be immaterial to our financial condition. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Shares of our common stock, par value $.01 per share, which we refer to herein as our Common Stock, are traded sporadically under the symbol CMTX on the Over-the-Counter Bulletin Board of the National Association of Securities Dealers, or OTCBB. The range of high and low bid quotations for the Common Stock, as reported on the OTCBB, for each quarterly period during fiscal years 2001 and 2002 is shown below: Fiscal Year Ended June 30, 2001 High Low - ------------------------------- ---- ----- First Quarter (7/1 to 9/30/00) 5.25 3.00 Second Quarter (10/1 to 12/31/00) 3.56 1.50 Third Quarter (1/1 to 3/31/01) 2.69 1.06 Fourth Quarter (4/1 to 6/30/01) 1.60 0.73 Fiscal Year Ended June 30, 2002 High Low - ------------------------------- ---- ----- First Quarter (7/1 to 9/30/01) 0.83 0.26 Second Quarter (10/1 to 12/31/01) 0.54 0.28 Third Quarter (1/1 to 3/31/02) 0.75 0.41 Fourth Quarter (4/1 to 6/30/02) 0.60 0.27 The approximate number of holders of record of our Common Stock as of September 20, 2002 was 575. We have never declared or paid a cash dividend on our Common Stock and do not anticipate the declaration or payment of cash dividends to shareholders in the foreseeable future. Item 6. Selected Financial Data The following table sets forth selected financial data for each of our last five fiscal years. Fiscal Year Ended June 30, (amounts in thousands except per share data) 2002 2001 2000 1999 1998 ---- ----- ----- ---- ---- Total Revenues $ 12,248 $ 16,598 $12,645 $ 7,557 $ 5,401 Operating (Loss)/Income $ (1,277) $ 310 $ 1,308 $ 542 $ 156 Net (Loss)/Income $ (1,361) $ 265 $ 1,241 $ 456 $ 64 Basic Net (Loss)/Income Per Share $ (.12) $ .03 $ .14 $ .06 $ .01 Diluted Net (Loss)/Income Per Share $ (.12) $ .02 $ .10 $ .04 $ .01 Balance Sheet Data at Year End: Total Assets $ 5,600 $ 6,565 $ 5,977 $ 2,408 $ 1,434 Long-term Obligations $ 948 $ 954 $ 987 $ 1,047 $ 833
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Our revenues come primarily from charges to distributors for the licensing of enhanced content, including CustomWires, Newsroom products and the publishers' full feeds, as well as from News Solutions hosting services. Distributor licenses typically consist of fixed fees as well as minimum royalty commitments. Royalties are based upon our customers' business and revenue models such that their success in their market generates increasing revenues for us. We are based in the United States and have a wholly owned subsidiary, nFactory COMTEX, S.L. operating in Madrid, Spain. The subsidiary was formed to expand our operations throughout Europe. Application of Critical Accounting Policies Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting policies generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe the following critical accounting policies affect significant judgments, estimates and assumptions used in the preparation of the consolidated financial statements. Revenue Information services revenues are recognized as services are rendered based on contractual terms such as usage, fixed fee, percentage of distributor revenues or other pricing models. Start-up fee revenues, charges for implementation and initial integration support of our products, are recognized over the initial term of the contract pursuant to the SEC Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements. Amounts received in advance are deferred and recognized over the service period. Certain royalty revenues are estimated based on prior usage reports and adjusted accordingly upon reporting from customers. Long-lived Assets, Including Capitalized Software We evaluate, on a quarterly basis, our long-lived assets to be held and used, including capitalized software, to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. We base our evaluation on certain impairment indicators, such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If these impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, we then use an estimate of the undiscounted value of expected future operating cash flows to determine whether the asset is recoverable and measure the amount of any impairment as the difference between the carrying amount of the asset and its estimated fair value. The fair value is estimated using valuation techniques such as market prices for similar assets or discounted future operating cash flows. Contingencies From time to time, we are subject to proceedings, lawsuits and other claims related to labor and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these contingencies as well as potential ranges of probable losses and establish reserves accordingly. The amounts of reserve required, if any, may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy. RESULTS OF OPERATIONS Comparison of the Fiscal Year ended June 30, 2002 to the Fiscal Year ended June 30, 2001 Revenues consist primarily of royalty revenues and fees from the licensing of content products to information distributors. During the year ended June 30, 2002, our total revenues were approximately $12,248,000, a decrease of approximately $4,350,000, or 26%, from total revenues of approximately $16,598,000 for the year ended June 30, 2001. The decline in revenues is the direct result of business shut downs and consolidation among clients, primarily in the Internet and personal investor markets. In addition, revenues from new customers in the current fiscal year were less than the revenues generated from new customers in the prior fiscal year. Our cost of revenues consists primarily of content licensing fees and royalties to content providers, as well as data communication costs for the delivery of our products to customers. The cost of revenues for the year ended June 30, 2002 was approximately $4,058,000, a decrease of approximately $620,000, or 13%, from the cost of revenues for the year ended June 30, 2001. The decrease in cost is primarily due to the decrease in content royalties as a result of decreased revenues for the period. The decrease in content royalties is limited by required minimum fees paid to certain information providers and therefore, does not directly track the decrease in revenues. The gross profit for the year ended June 30, 2002 was approximately $8,189,000, a decrease of approximately $3,730,000, or 31%, over the prior year. The gross margin percentage declined for the year ended June 30, 2002 to approximately 67% from approximately 72% in the prior year. The decline is based on the decrease in revenues without a corresponding decrease in content royalties as discussed above. Total operating expenses for the year ended June 30, 2002 were approximately $9,466,000, a decrease of approximately $2,143,000, or 18%, from the operating expenses for the year ended June 30, 2001. The decrease in operating expenses reflects reductions in personnel across all departments, reduced sales and marketing expenses and a decrease in stock- based compensation. These expense reductions were implemented in response to a decline in revenue over the previous twelve months. The decrease in operating expenses was partially offset by increased consulting activities aimed at exploring business development opportunities, expenses related to our European subsidiary, increased legal and accounting fees and an increase in depreciation and amortization expense. Technical operations and support expenses during the year ended June 30, 2002 decreased approximately $1,012,000, or 31%, from these expenses in the year ended June 30, 2001. This decrease resulted from a decrease in personnel, computer parts, software maintenance and consulting expenses. The decrease in expenses also includes an adjustment to software expense related to the return of certain software and renegotiated license fees. Product development expenses decreased by approximately $242,000, or 40%, for the year ended June 30, 2002 compared to the year ended June 30, 2001. This decrease is the result of personnel reductions in this department. Product development activities include quality assurance, enhancements to our products and the development of proprietary news products. Sales and marketing expenses decreased by approximately $1,255,000, or 46%, for the year ended June 30, 2002 compared to the year ended June 30, 2001. This decrease is the result of a reduction in personnel, decreases in advertising and promotional activities, public relations expenses and sales commissions. In addition, travel, entertainment and conference costs were significantly lower in the current year compared to the previous year. The decrease in expenses was slightly offset by the sales and marketing expenses of our European subsidiary. General and administrative expenses for the year ended June 30, 2002 were approximately $334,000, or 8%, greater than these expenses during the year ended June 30, 2001. This increase in expenses resulted from increases in legal and accounting fees for litigation issues and SEC filings, consulting activities to explore business development opportunities and Board of Directors fees related to additional meetings. The increase was partially offset by decreases in personnel and related costs including recruiting, employee relations and office supplies. In connection with the transfer of stock options from the Chairman of our Board of Directors to certain employees, we recorded stock-based compensation expense of approximately $7,000 during the year ended June 30, 2002, compared to approximately $315,000 for the year ended June 30, 2001. The decrease in stock-based compensation is a result of the decrease in the fair market value of our common stock as of the dates of transfer. Depreciation and amortization expenses for the year ended June 30, 2002 were approximately $340,000, or 44%, higher than these expenses during the prior year. The increase was due primarily to the deployment of upgraded production software and hardware in the Spring of 2001 and increased capital expenditures related to increasing the capacity and redundancy of the production systems over the past twelve months. Other expense, net of interest income and interest expense, increased approximately $41,000, or 96%, during the year ended June 30, 2002 from the prior year. This increase was due to reduced interest earned on lower cash balances. Comparison of the Fiscal Year ended June 30, 2001 to the Fiscal Year ended June 30, 2000 Revenues consist primarily of royalty revenues and fees from the licensing of content products to information distributors. During the year ended June 30, 2001, our total revenues were approximately $16,598,000, an increase of approximately $3,952,000, or 31%, from total revenues of $12,645,000 for the year ended June 30, 2000. Our revenues from new customers were partially offset by a decline in revenues from existing customers. Many of these customers were in the internet and personal investor markets who declared bankruptcy or who were unable to obtain funding and remain in business. Our cost of revenues consists primarily of content licensing fees and royalties to content providers, as well as data communication costs for the delivery of our products to customers. The cost of revenues for the year ended June 30, 2001 was approximately $4,678,000, an increase of approximately $856,000, or 22%, from the cost of revenues for the year ended June 30, 2000. The increase in cost was primarily due to an increase in content royalties related to the increase in revenues for the period. The increase was offset partially by decreases in data communications costs resulting from the continued implementation of more cost-effective vehicles for the delivery of our products to our customers. With the increased reliability and industry-wide acceptance of the internet, we transitioned customers from higher cost satellite/FM and leased line deliveries to internet delivery of our content. The gross profit for the year ended June 30, 2001 was approximately $11,920,000, an increase of approximately $3,097,000, or 35%, over the prior year. The gross margin percentage improved for the year ended June 30, 2001 to approximately 72% from approximately 70% in the prior year due to the decrease in data communications costs discussed above. Total operating expenses for the year ended June 30, 2001 were approximately $11,609,000, an increase of approximately $4,095,000, or 54%, from the operating expenses for the year ended June 30, 2000. This increase in operating expenses included increases in expenses associated with the addition of personnel and technology to support increased distributors and content providers; increases in marketing and public relations activities; and expenditures to promote COMTEX and our products and services. In addition, we incurred an increase of approximately $315,000 in stock-based compensation. Technical operations and support expenses during the year ended June 30, 2001 increased approximately $1,131,000, or 54%, over these expenses in the year ended June 30, 2000. This increase was due primarily to increased personnel, software and maintenance expenses, offset partially by decreased consulting expenses related to software support of our former content- processing platform. Product development expenses increased by approximately $150,000, or 33%, for the year ended June 30, 2001 compared to the year ended June 30, 2000. This increase was the result of additional personnel and related expenses. Product development activities include quality assurance, enhancements to our products, and the development of proprietary news products. Sales and marketing expenses increased by approximately $429,000, or 19%, for the year ended June 30, 2001 compared to the year ended June 30, 2000. This increase was due to the addition of sales and marketing personnel and advertising and public relations expenses related to the promotion and branding of COMTEX and our products and services. General and administrative expenses for the year ended June 30, 2001 were approximately $1,540,000, or 64%, greater than these expenses during the year ended June 30, 2000. This increase was due to additional personnel and related expenses, increased legal fees and investor relations consulting, expanded office space and an increase of approximately $598,000 in the provision for bad debts. The increase in bad debt expense related in large part to the loss of customers due to their lack of funding and/or bankruptcies. In connection with the transfer of stock options from the chairman of our board of directors to certain employees, we recorded stock-based compensation expense of approximately $315,000 during the year ended June 30, 2001. We did not record stock-based compensation during fiscal year 2000. Depreciation and amortization expenses for the year ended June 30, 2001 were approximately $531,000, or 218% higher than these expenses during the prior year. The increase was due primarily to the deployment of upgraded production software and hardware and increased capital expenditures related to increasing capacity and redundancy of our production systems, as well as furniture and equipment for the addition of personnel. Other expense, net of interest income and interest expense, decreased approximately $24,000, or 36%, during the year ended June 30, 2001 from the prior year, reflecting an increase in interest income earned on our cash balances. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For the year ended June 30, 2002, we incurred an operating loss of approximately $1,277,000 and a net loss of approximately $1,361,000. At June 30, 2002, we had a working capital deficit of approximately $408,000 as compared with working capital of approximately $131,000 at June 30, 2001. The decrease in working capital was due primarily to the accrual of estimated fees related to the Infospace lawsuit as well as the use of cash for capital expenditures and contributions to our subsidiary, as discussed below. We had net stockholders' equity of approximately $2,100,000 at June 30, 2002, as compared to net stockholders' equity at June 30, 2001, of approximately $3,109,000. The decrease in stockholders' equity was due primarily to the net loss incurred during the fiscal year ended June 30, 2002, partially offset by the exercise of stock options, and the issuance of stock under the Employee Stock Purchase Plan. For the year ended June 30, 2002, our operating activities generated approximately $773,000 in cash. We had cash of approximately $861,000 at June 30, 2002, compared to approximately $367,000 at June 30, 2001. We made capital expenditures of approximately $582,000 in the year ended June 30, 2002, primarily for software licensing and the development of software for internal use, compared to $2,684,000 for the same period ended June 30, 2001. These investments improve our product capabilities, reliability and our ability to meet future content and client processing requirements. We expect capital expenditures to remain at or below the fiscal year 2002 level for the next fiscal year. We have experienced a significant loss of annuity revenue due to failing businesses, bankruptcies or lack of funding and consolidation within our customer base over the past 18 months. We have responded to this market dynamic by initiating appropriate operating expense reductions and expansion of our products to promote to our existing customers, as well as to diversify the markets we serve. In June 2001, we obtained a $500,000 line of credit to assist us with short-term fluctuations in cash flow, if necessary. The line of credit bore interest at the Prime Rate and expired June 29, 2002. We did not utilize this facility. In addition, we obtained a $50,000 three-year financing agreement to purchase software and related maintenance with Compaq Financial Services that expires April 2005. In August 2001, we signed an amendment to the 10% Senior Subordinated and Secured Note payable to AMASYS Corporation ("AMASYS"), extending the due date of the note from July 1, 2002 to July 1, 2008. Included in the amendment is a provision for AMASYS to convert all or a portion of the outstanding principal amount, plus accrued interest, into common stock of COMTEX. The note is convertible at a price of $1.00 per share, which price increases by $0.10 upon each anniversary of the amendment. There is no restriction on the number of shares that may be issued upon conversion of the note. During the second quarter of fiscal year 2002, our wholly owned subsidiary, nFactory COMTEX, S.L., located in Madrid, Spain, began operations. The subsidiary was formed to sell existing COMTEX products to clients in Western Europe and establish a customer foundation for selected new product initiatives. The effective date of the agency agreement between COMTEX and the subsidiary is May 1, 2002. All payments made to or on behalf of the subsidiary prior to that date are recorded as capital contributions. For the year ended June 30, 2002, we made capital contributions of approximately $212,000. The financial statements included with this annual report present the consolidated financial results of COMTEX and its subsidiary. The Company's future contractual obligations and commitments as of June 30, 2002 are as follows: Amounts Due by Period: 2008 and 2003 2004 2005 2006 2007 thereafter ------------------------------------------------------------------ Operating Leases $591,718 $495,583 $484,019 $498,540 $513,496 $617,493 Capital Leases 21,060 21,060 17,550 0 0 0 Note Payable 0 0 0 0 0 914,954 ------------------------------------------------------------------ Total $612,778 $516,643 $501,569 $498,540 $513,496 $1,532,447
Currently, our operations generate cash flow sufficient to cover our monthly expenses and we believe that cash from operations will provide us with adequate cash resources to meet our obligations on a short-term basis. Our ability to meet our liquidity needs on a long-term basis depends on our ability to generate sufficient revenues and cash to cover our current obligations and to pay down our current and long-term debt obligations. Any further corporate consolidation or market deterioration affecting our customers could limit our ability to generate such revenues. No assurance may be given that we will be able to maintain the revenue base or the size of profitable operations that may be necessary to achieve our liquidity needs. EBITDA, as defined below, decreased approximately 111% to a loss of approximately $156,000 for the year ended June 30, 2002 compared to a positive $1,398,000 for fiscal year 2001. The decrease is due to the decline in revenues and gross profit margin as well as an increase in legal fees, offset partially by decreased operating expenses, excluding stock-based compensation, depreciation and amortization. EBITDA consists of earnings before interest expense, interest and other income, income taxes, stock-based compensation and depreciation and amortization. EBITDA does not represent funds available for management's discretionary use and is not intended to represent cash flow from operations. EBITDA should also not be construed as a substitute for operating income or a better measure of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles. EBITDA excludes components that are significant in understanding and assessing our results of operations and cash flows. In addition, EBITDA is not a term defined by generally accepted accounting principles and as a result our measure of EBITDA might not be comparable to similarly titled measures used by other companies. However, we believe that EBITDA is relevant and useful information, which is often reported and widely used by analysts, investors and other interested parties in our industry. Accordingly, we are disclosing this information to permit a more comprehensive analysis of our operating performance, as an additional meaningful measure of performance and liquidity, and to provide additional information with respect to our ability to meet future debt service, capital expenditure and working capital requirements. See the audited financial statements and notes thereto contained elsewhere in this report for more detailed information. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS An investment in our common stock involves a high degree of risk. The following risk factors should be considered carefully in evaluating COMTEX News Network and our business. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. Our financial condition, operating results and the trading price of our common stock could be materially, adversely affected due to any of these risks, in which case you could lose all or part of your investment. In assessing these risks, you should also refer to the other information in this and our other public filings, including our financial statements and notes thereto. We Depend On the Continued Growth In the Use of the Internet, Particularly For News and Financial Information Our business depends on businesses and individual consumers continuing to increase their use of the Internet for obtaining news and financial information. Internet usage may be inhibited for a number of reasons including inadequate network infrastructure; security concerns; inconsistent quality of service; and availability of cost-effective, high-speed service. Because the market for our products is rapidly evolving, it is difficult to predict with any certainty the growth rate, if any, and the ultimate size of our markets. If the market fails to continue to develop, develops more slowly than expected or becomes saturated with competitors; if our services do not maintain significant market acceptance; if our customers' business models are not successful; or if pricing becomes subject to considerable competitive pressures; our business operations and financial condition would be materially, adversely affected. We Face Intense Competition That Could Impede Our Ability to Grow and Maintain Profitability The business information services industry is intensely competitive and is characterized by rapid technological change and entry into the field by large and well-capitalized companies. Many of our competitors have substantially greater financial, technical and marketing resources than we do. Our competitors include Internet-focused aggregators and distributors of content, individual national and international electronic news and information services, and traditional content providers seeking new markets for their content or seeking direct relationships with distributors. We expect competition to continue to increase as the market for content aggregation increases, as current competitors improve their offerings, as new competitors attempt to enter the market, and as traditional content providers seek new markets for their content and direct relationships with distributors. While we believe our continued investment in content, new products and technology, as well as the expansion of our distributor partnerships will continue to favorably position us in the market, it is possible that our competitors may acquire significant market share and we may not be able to retain our customers. Furthermore, increased competition on the basis of price, delivery systems or otherwise, may require us to implement price reductions or increase our spending on marketing or software development, which could have a material, adverse affect on our business and operating results. If We Are Unable to Maintain Our Reputation and Expand Our Name Recognition, We May Have Difficulty Attracting New Business and Retaining Current Customers and Employees We believe that establishing and maintaining a good reputation and name recognition are critical for attracting and retaining customers and employees. We believe that the importance of reputation and name recognition will increase due to the growing number of providers of Internet services. If our reputation is damaged or if potential customers are not familiar with us, we may be unable to attract new, or retain existing, customers and employees. Promotion and enhancement of our name will depend largely on our success in continuing to provide effective services. If customers do not perceive our services to be effective or of high quality, our brand name and reputation will suffer. Some of Our Customers Are Recently Established Internet Companies Who Pose Credit Risks While we continue to attract and retain large and mid-sized, established customers, a number of our customers are smaller Internet companies with limited operating histories, who operate at a loss and have limited cash reserves and limited access to additional capital. With some of these customers, we have experienced difficulties collecting accounts receivable. In addition, we lost some customers directly due to the failure of their business models to sustain operations. We may continue to encounter these difficulties in the future. If any significant part of our customer base continues to experience economic difficulties or is unable to pay our fees, for any reason, our business would be materially, adversely affected. We Could Face Additional Risks and Challenges as We Expand Internationally and May Face Unexpected Costs in Developing International Revenues We have created a foreign subsidiary corporation in anticipation of expanding our international presence. If our revenues from international operations do not exceed the expense of maintaining these operations, our business, financial condition and operating results may be materially, adversely affected. We have only limited experience in international operations and we may not be able to capitalize on our investment in these markets. In addition, there are risks inherent in doing business internationally, including the following: O unexpected changes in regulatory requirements O potentially adverse tax consequences O export restrictions and controls O tariffs and other trade barriers O difficulties in staffing and managing foreign operations O political instability O fluctuations in currency exchange rates O seasonal reductions in business activity during the summer months. Any of these risks could have a material, adverse affect on the success of our international operations and on our business, financial condition and operating results. Unauthorized Break-ins to Our Systems Could Harm Our Business Although we have implemented strict security policies and perimeter defenses, our computer and telecommunications systems are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions in, delays in or loss of data. In addition, unauthorized persons may improperly access our data. Any intrusions may harm us and may be very expensive to remedy and could damage our reputation and discourage new and existing customers from using our service. If Equipment Failures Interrupt the Distribution of Content to Our Customers, We Could Lose Customers and Our Reputation May Be Adversely Affected We rely on third-party telecommunications networks for the distribution of our content. Any failure of these networks could interrupt or delay our service, which could lead to customers canceling contracts and could damage our reputation and our ability to attract additional customers. Substantially all of our computer and communications hardware resides in one location in Alexandria, Virginia. Any disaster, power outage or system failure that causes interruptions in our ability to provide our services to our customers could reduce customer satisfaction and our ability to attract additional customers. Losing Major Content Providers May Leave Us With Insufficient Breadth Of Content To Retain And Attract Customers We do not generate original content and are therefore highly dependent upon third-party content providers. If we were to lose one of our major content providers and were not able to obtain similar content from another source, our services would be less attractive to customers. In addition, we cannot be certain that we will be able to license content from our current or new providers on favorable terms in the future, if at all. We Depend on Key Personnel Our future success will depend to a significant extent on the continued services of our senior management and other key personnel. We do not maintain "key person" life insurance for any of our personnel. Our future success will also depend on our ability to attract, retain and motivate other highly skilled employees. Companies in our industry compete intensely to hire and retain qualified personnel and if we are not able to attract the employees we need or retain the services of those we have hired, our business operations would be materially, adversely affected. Our Common Stock Price is Volatile and Could Fluctuate Significantly The trading price of our Common Stock has been, and may continue to be, subject to wide fluctuations. Our stock is traded on the OTCBB, which limits our exposure to market analysts, and in turn may limit our volume of trading. During fiscal year 2002, the closing prices of our Common Stock ranged from $0.26 to $0.83. Our stock price may fluctuate in response to a number of events and factors, such as the following: O quarterly variations in operating results O announcements of technological innovations or new products by us or our competitors O the operating and stock price performance of other companies that investors may deem comparable O news reports relating to trends in our markets. In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our Common Stock, regardless of our operating performance. Potential Acquisitions and Strategic Investments May Result in Increased Expenses, Difficulties in Integrating Target Companies and Diversion of Management's Attention We anticipate that from time to time, we may consider acquisitions of assets or businesses that we believe may enable us to obtain complementary skills and capabilities, offer new services, expand our customer base or obtain other competitive advantages. Growth through acquisitions involves potential risks, including, but not limited to, the following: O the diversion of management's attention during the acquisition process O costs, delays and difficulties of integrating the acquired company's operations, technology and personnel into our operations O the adverse affect on earnings of amortizing any intangible assets acquired O the issuance of new equity securities diluting the holdings of existing stockholders O the uncertainty of working with new employees and customers. We Do Not Intend to Pay Dividends We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future. Our Executive Officers, Directors and 5% or Greater Stockholders Significantly Influence All Matters Requiring Stockholder Vote Our executive officers and directors, in the aggregate, beneficially own approximately 50% of our outstanding common stock. As a result, our executive officers and directors are able to significantly influence the outcome of all matters requiring approval by our stockholders, including the election of directors and approval of significant transactions. This concentration of ownership could delay, deter or prevent a change of control and could adversely affect the price that investors are willing to pay in the future for shares of our common stock. Item 7A. Quantitative and Qualitative Disclosure about Market Risk. We are exposed to various market risks, including changes in foreign currency exchange rates. However, our exposure to currency exchange rate fluctuations has been and is expected to continue to be modest due to the fact that the operations of our Spanish subsidiary are almost exclusively conducted in local currency. Operating results are translated into U.S. dollars and consolidated for reporting purposes. The impact of currency exchange rate movements as of June 30, 2002 was not material. We do not engage in hedging activities. Item 8. Financial Statements and Supplementary Data The information required by this item is set forth under Item 15, which is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III The information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K has been omitted in reliance on General Instruction G(3) to Form 10-K and is incorporated herein by reference to our proxy statement to be filed with the Securities and Exchange Commission ("SEC") pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended. Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Item 14. Controls and Procedures PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements Report of Independent Auditors F-1 Balance Sheets at June 30, 2002 and 2001 F-2 Statements of Operations for the fiscal years ended June 30, 2002, 2001, and 2000 F-3 Statements of Stockholders' Equity (Deficit) for the fiscal years ended June 30, 2002, 2001 and 2000 F-4 Statements of Cash Flows for the fiscal years ended June 30, 2002, 2001 and 2000 F-5 Notes to Financial Statements F-6 2. Financial Statement Schedules The schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (b) Reports on Form 8-K None (c) Exhibits 3.1 Restated Certificate of Incorporation of the Company, (incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 2-72408 NY), declared effective on July 22, 1981). 3.2 Certificate of Amendment of Certificate of Incorporation of the Company effective May 14, 1996 (incorporated by reference to Form 10-K dated June 30, 1996). 3.3 Amended and Restated By-Laws of the Company (incorporated by reference to Form 10-K dated June 30, 1997). 10.4 Stock Option Agreement between the Company and C.W. Gilluly and Marny Gilluly, dated May 16, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q dated March 31, 1995). 10.6 Agreement between Infotechnology, Inc. and the Company, dated May 16, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q dated March 31,1995). 10.8 Amended, Consolidated and Restated 10% Senior Subordinated Secured Note, dated May 16, 1995 (incorporated by reference to the Company's Quarterly Report on Form 10-Q Dated March 31, 1995). 10.9 Comtex Scientific Corporation 1995 Stock Option Plan (incorporated by reference to the Company's Proxy Statement dated November 9, 1995). 10.10 Lease Agreement between Plaza IA Associates Limited Partnership and the Company dated April 6, 1996 (incorporated by reference to the Company's Quarterly Report on Form 10-Q dated March 31, 1996). 10.14 Employment Agreement with Charles W. Terry dated July 29, 1994 (incorporated by reference to Company's Form 10-Q dated September 30, 1998). 10.15 First Allonge to Amended, Consolidated and Restated 10% Senior Subordinated Secured Note between the Company and AMASYS Corporation dated as of June 30, 1999 (incorporated by reference to Company's Form 10-K dated June 30, 1999). 10.16 First Amendment to Comtex Scientific Corporation 1995 Stock Option Plan, effective September 15, 1997, dated February 7, 2000 (incorporated by reference to Company's Form 10-K dated June 30, 2001). 10.17 Second Amendment to Comtex Scientific Corporation 1995 Stock Option Plan, effective December 2, 1999, dated February 7, 2000 (incorporated by reference to Company's Form 10-K dated June 30, 2001). 10.18 Third Amendment to Comtex News Network, Inc. 1995 Stock Option Plan, effective December 7, 2000, dated June 1, 2001 (incorporated by reference to Company's Form 10-K dated June 30, 2001). 10.19 Second Amendment to Amended, Consolidated and Restated 10% Senior Subordinated Secured Note between the Company and AMASYS Corporation dated as of August 31, 2001 (incorporated by reference to Company's Form 10-K dated June 30, 2001). 10.20 First Amendment to Employment Agreement with Charles W. Terry dated October 1, 2001 (incorporated by reference to the Company's Quarterly Report on Form 10-Q dated September 30, 2001). 10.21 Second Amendment to Employment Agreement with Charles W. Terry dated September 10, 2002. 21 Subsidiaries of the Registrant (incorporated by reference to the Company's Quarterly Report on Form 10-Q dated December 31, 2001) 23 Consent of Independent Auditors. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 30, 2002 COMTEX NEWS NETWORK, INC. By: /s/ Charles W. Terry By: /s/ Robin Y. Deal Charles W. Terry Robin Y. Deal President and Chief Executive Vice President, Finance & Officer Accounting (Principal Executive Officer) (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. DIRECTORS: Signature Title Date /s/ C.W. Gilluly, Ed.D. Chairman September 30, 2002 C.W. Gilluly, Ed.D. and Director /s/ John S. Brunette Director September 30, 2002 John S. Brunette /s/ Erik Hendricks Director September 30, 2002 Erik Hendricks /s/ Robert A. Nigro Director September 30, 2002 Robert A. Nigro /s/ Charles W. Terry Director, September 30, 2002 Charles W. Terry President and CEO CERTIFICATIONS* I, Charles W. Terry, certify that: 1. I have reviewed this annual report on Form 10-K of Comtex News Network, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; Date: September 30, 2002 /s/ Charles W. Terry President and Chief Executive Officer I, Robin Y. Deal, certify that: 1. I have reviewed this annual report on Form 10-K of Comtex News Network, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; Date: September 30, 2002 /s/ Robin Y. Deal Vice President, Finance & Accounting * Pursuant to the transition provisions of Rules 13a-14 and 15d-14, paragraphs (b)(4), (5) and (6) of these certifications are omitted, as the reporting period covered by the annual report for which these certifications are made ended prior to the effective date of Rules 13a- 14 and 15d-14. CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Charles W. Terry, the President and Chief Executive Officer of Comtex News Network, Inc. (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Annual Report on Form 10-K for the period ending June 30, 2002 (the "Report"). The undersigned hereby certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 30, 2002 /s/ Charles W. Terry President and Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Robin Y. Deal, the Vice President, Finance and Accounting of Comtex News Network, Inc. (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Annual Report on Form 10-K for the period ending June 30, 2002 (the "Report"). The undersigned hereby certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: September 30, 2002 /s/ Robin Y. Deal Vice President, Finance & Accounting REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders COMTEX News Network, Inc. We have audited the accompanying consolidated balance sheets of COMTEX News Network, Inc. as of June 30, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended June 30, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of COMTEX News Network, Inc. at June 30, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP McLean, Virginia August 29, 2002 COMTEX NEWS NETWORK, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 and 2001 2002 2001 ------------- ------------- ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 860,548 $ 367,493 Accounts Receivable, Net of Allowance of approximately $300,000 and $554,000 at June 30, 2002 and June 30, 2001, respectively 1,071,717 1,904,409 Prepaid Expenses and Other Current Assets 211,673 360,686 ------------- ------------- TOTAL CURRENT ASSETS 2,143,938 2,632,588 PROPERTY AND EQUIPMENT, NET 3,245,026 3,730,653 DEPOSITS AND OTHER ASSETS 210,747 201,802 ------------- ------------- TOTAL ASSETS $ 5,599,711 $ 6,565,043 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Expenses $ 2,433,982 $ 2,170,385 Deferred Revenue 102,987 331,449 Capital Lease Obligations, Current 14,492 - ------------- ------------- TOTAL CURRENT LIABILITIES 2,551,461 2,501,834 LONG-TERM LIABILITIES: Capital Lease Obligations, Long-Term 33,307 - Long-Term Note Payable - Affiliate 914,954 953,954 ------------- ------------- TOTAL LONG-TERM LIABILITIES 948,261 953,954 ------------- ------------- TOTAL LIABILITIES 3,499,722 3,455,788 COMMITMENTS AND CONTINGENCIES (Note 11) STOCKHOLDERS' EQUITY Common Stock, $0.01 Par Value - Shares Authorized: 18,000,000; Shares Shares issued and outstanding: 13,140,893 and 10,191,373, respectively 131,409 101,914 Additional Capital 12,192,973 11,867,469 Accumulated Deficit (10,221,151) (8,860,128) Foreign Currency Translation Adjustment (3,242) - ------------- ------------- Total Stockholders' Equity 2,099,989 3,109,255 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,599,711 $ 6,565,043 ============= =============
The accompanying "Notes to Consolidated Financial Statements" are an integral part of these consolidated financial statements F-2 COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Year Ended June 30, 2002 2001 2000 ------------- ------------- ------------- Revenues $12,247,694 $ 16,597,518 $12,645,344 Cost of Revenues 4,058,389 4,677,945 3,822,385 ------------- ------------- ------------- Gross Profit 8,189,305 11,919,573 8,822,959 Operating Expenses Technical Operations & Support 2,230,210 3,242,673 2,111,843 Product Development 363,185 605,433 455,834 Sales and Marketing 1,454,981 2,710,316 2,281,350 General and Administrative 4,296,970 3,962,681 2,422,394 Stock-based Compensation 6,678 314,600 - Depreciation and Amortization 1,114,158 773,672 243,075 ------------- ------------- ------------- Total Operating Expenses 9,466,182 11,609,375 7,514,496 ------------- ------------- ------------- Operating Income/(Loss) (1,276,877) 310,198 1,308,463 Other income/(expense) Interest Expense (95,689) (102,698) (106,121) Interest Income 10,354 68,915 52,586 Other Income/(Expense) 1,614 (8,859) (12,987) ------------- ------------- ------------- Other Expense, net (83,721) (42,642) (66,522) ------------- ------------- ------------- Income/(Loss) Before Income Taxes (1,360,598) 267,556 1,241,941 Income Taxes 425 2,103 444 ------------- ------------- ------------- Net Income/(Loss) $(1,361,023) $ 265,453 $ 1,241,497 ============= ============= ============= Basic Earnings/(Loss) Per Common Share $ (.12) $ .03 $ .14 ============= ============= ============= Weighted Average Number of Common Shares 11,348,923 10,026,735 9,051,214 ============= ============= ============= Diluted Earnings/(Loss) Per Common Share $ (.12) $ .02 $ .10 ============= ============= ============= Weighted Average Number of Shares Assuming Dilution 11,348,923 13,969,090 1 2,669,045 ============= ============= =============
The accompanying "Notes to Consolidated Financial Statements" are an integral part of these consolidated financial statements F-3 COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE FISCAL YEARS ENDED JUNE 30, 2002, 2001 AND 2000 Common Shares Outstanding -------------------------------------- Number of Par Additional Shares Value Capital ---------------- ---------------- ---------------- Balance at June 30, 1999 8,124,430 $ 81,244 $ 10,031,801 Exercise of Stock Options 524,647 5,247 75,043 Issuance of Stock - ESPP 18,820 188 47,243 Private Placement Shares 1,300,000 13,000 1,249,739 Net Income ---------------- ---------------- ----------------- Balance at June 30, 2000 9,967,897 99,679 11,403,826 Exercise of Stock Options 134,180 1,342 62,574 Issuance of Stock - ESPP 89,296 893 86,469 Stock-based compensation 314,600 Net Income ---------------- ---------------- ---------------- Balance at June 30, 2001 10,191,373 101,914 11,867,469 Exercise of Stock Options 2,859,728 28,597 289,227 Issuance of Stock - ESPP 89,792 898 29,599 Stock-based compensation 6,678 Foreign currency adjustment Net Loss ---------------- ---------------- ---------------- Balance at June 30, 2002 13,140,893 $ 131,409 $ 12,192,973 ================ ================ ================
COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE FISCAL YEARS ENDED JUNE 30, 2002, 2001 AND 2000 Total Accumulated Other Comprehensive Stockholders Deficit Income/(Loss) Equity/(Deficit) ---------------- ------------------- ----------------- Balance at June 30, 1999 $(10,367,078) $ - $ (254,033) Exercise of Stock Options 80,290 Issuance of Stock - ESPP 47,431 Private Placement Shares 1,262,739 Net Income 1,241,497 1,241,497 ---------------- ------------------- ------------------ Balance at June 30, 2000 (9,125,581) - 2,377,924 Exercise of Stock Options 63,916 Issuance of Stock - ESPP 87,362 Stock-based compensation 314,600 Net Income 265,453 265,453 ---------------- ------------------- ----------------- Balance at June 30, 2001 (8,860,128) - 3,109,255 Exercise of Stock Options 317,824 Issuance of Stock - ESPP 30,497 Stock-based compensation 6,678 Foreign currency adjustment (3,242) (3,242) Net Loss (1,361,023) (1,361,023) ---------------- ------------------- ----------------- Balance at June 30, 2002 $(10,221,151) $ (3,242) $ 2,099,989 =============== =================== =================
The accompanying "Notes to Consolidated Financial Statements" are an integral part of these consolidated financial statements F-4 COMTEX NEWS NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended June 30, ------------------------------------------------- 2002 2001 2000 -------------- -------------- --------------- Cash Flows from Operating Activities: Net (Loss)/Income $ (1,361,023) $ 265,453 $ 1,241,497 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Depreciation and Amortization Expense 1,114,158 773,672 243,075 Bad Debt Expense 412,497 823,850 225,500 Stock-based compensation 6,678 314,600 - Loss on disposal of assets 416 8,859 166,238 Changes in Assets and Liabilities: Accounts Receivable 420,195 (635,132) (971,864) Prepaid Expenses and Other Current Assets 155,653 (181,420) (113,030) Deposits and Other Assets (8,945) 18,176 (165,786) Accounts Payable and Accrued Expenses 261,524 (140,448) 888,710 Deferred Revenue (228,462) 90,507 88,461 --------------- --------------- -------------- Net Cash provided by Operating Activities 772,691 1,338,117 1,602,801 Cash Flows from Investing Activities: Purchases of Property and Equipment (583,113) (2,684,124) (1,395,772) Proceeds from Disposal of Assets 813 - 2,450 --------------- --------------- ------------- Net Cash used in Investing Activities (582,300) (2,684,124) (1,393,322) Cash Flows from Financing Activities: Repayments on Note Payable - Affiliate (39,000) (93,000) (40,000) Repayments - Capital Lease Obligation (2,201) - - Proceeds from Issuance of Stock - Private Placement - - 1,262,739 Proceeds from Issuance of Stock - Employee Stock Purchase Plan 30,497 87,362 47,431 Proceeds from Exercise of Stock Options 317,824 63,916 80,290 --------------- --------------- ------------- Net Cash provided by Financing Activities 307,120 58,278 1,350,460 Effect of Exchange Rate Changes on Cash (4,456) - - --------------- --------------- ------------- Net Increase (Decrease) in Cash and Cash Equivalents 493,055 (1,287,729) 1,559,939 Cash and Cash Equivalents at Beginning of Period 367,493 1,655,222 95,283 --------------- --------------- -------------- Cash and Cash Equivalents at End of Period $ 860,548 $ 367,493 $ 1,655,222 =============== =============== ==============
The accompanying "Notes to Consolidated Financial Statements" are an integral part of these consolidated financial statement F-5 COMTEX NEWS NETWORK, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 1. THE COMPANY COMTEX News Network, Inc. (the "Company" or "COMTEX") is a leading business-to-business "infomediary" providing real-time news content to business information retailers serving the financial services, individual and institutional investor, wireless and corporate information markets. COMTEX is headquartered in the United States with a wholly owned subsidiary in Madrid, Spain. The Company employs internally developed technology to aggregate and process an average of 20,000 full news stories a day from over 70 content sources. The information is aggregated to create and deliver real-time, subject-specific headline, summary and full story news and information products. The Company's network of distributors includes over one thousand information applications and web sites that benefit from receiving up-to-the-minute information delivered in an industry standard format, enhanced with keywords, metadata, stock ticker symbols and organized by subject. COMTEX's news products are read by millions of end-users. Consistent with standard practice in the information aggregation industry, the Company generally has renewable long-term contractual relationships with those information providers and information distributors with which it does business. These information services contracts typically provide for both minimum fees and royalties based upon expected and achieved volumes of usage. Fees and royalties from information distributors comprise the majority of the Company's revenues. Fees and royalties due to information providers, along with telecommunications costs and employee payroll costs, comprise the majority of the Company's costs and expenses. The Company operates and reports in one segment, information services. AMASYS Corporation, ("AMASYS") (the successor corporation to Infotechnology, Inc., "Infotech"), a Delaware corporation, legally or beneficially controls 2,153,437 (approximately 16%) of the issued and outstanding shares of the Company. In February 2002, C.W. Gilluly, Ed.D., the Chairman of the Board of Directors of both the Company and AMASYS, and his spouse, (the "Gillulys") exercised an option to acquire 2,130,503 shares owned by AMASYS and exercised an option to acquire an additional 2,192,503 shares. The Gillulys legally or beneficially control 4,367,506 shares (approximately 33%) of the issued and outstanding shares of the Company and directly own options to acquire an additional 100,000 shares of the Company's common stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Comtex News Network, Inc. and its wholly owned subsidiary nFactory Comtex, S.L. All significant intercompany transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with maturity dates of 90 days or less at the time of purchase to be cash equivalents. Revenue Recognition Information services revenues are recognized as services are rendered based on contractual terms such as usage, fixed fee, percentage of distributor revenues or other pricing models. Effective April 1, 2001, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. Previously, the Company recognized revenue for start- up fees upon execution of a contract for content services. The Company routinely completed implementation of its content feed to the customer at the time of execution. The Company now defers start- up fee revenues over the initial term of contracts for content services. The cumulative effect of the change was not material to the financial statements of the Company. Amounts received in advance are deferred and recognized over the service period. Foreign Currency Translation The Company has designated the Euro as the functional currency of its wholly-owned subsidiary in Spain. Accordingly, assets and liabilities are translated from the Euro into U.S. dollars at the end of period exchange rate, and revenues and expenses are translated at average monthly exchange rates. Foreign currency translation gains and losses are recorded in stockholders' equity and reflected as a component of other comprehensive income or loss. Total comprehensive loss for the year ended June 30, 2002 was approximately $1,364,000. Research and Development The Company conducts ongoing research and development in the areas of product enhancement and quality assurance. Such costs are expensed as incurred. Costs for fiscal years 2002, 2001 and 2000 were approximately $363,000, $605,000 and $456,000, respectively. Property and Equipment Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred and the cost of renewals and betterments are capitalized. Depreciation and amortization are computed using the straight- line method over the estimated lives of the related assets - five years for furniture and fixtures, computer equipment and software development and three years for purchased software. Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful lives of the related assets. Upon retirement or sale, the cost and related accumulated depreciation or amortization of assets is removed from the accounts and any resulting gain or loss is included in the determination of net income. Software for Internal Use The Company capitalizes certain costs incurred in the development of internal use software pursuant to the provisions of AICPA Statement of Position No. 98-1 (SOP 98-1) Accounting for the Costs of Computer Software for Internal Use. Capitalized costs consist of certain external direct costs of third party software integrated into the Company's product, development services performed by consultants and payroll costs for employees who are directly associated with the development process. Income Taxes Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. Stock Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of the grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and, accordingly, recognizes no compensation expense for the stock option grants under the Stock Option Plan. Risks and Uncertainties Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company periodically performs credit evaluations of its customers' financial condition and generally does not require collateral on accounts receivable. As of June 30, 2002 and 2001, none of the Company's customers accounted for 10% or more of gross revenues. The Company maintains reserves on accounts receivable and to date credit losses, in the aggregate, have not exceeded management's expectations. Earnings per Common Share Basic earnings per share ("EPS") is calculated by dividing net earnings available to common shares by weighted average common shares outstanding. Diluted EPS is calculated similarly, except that it includes the dilutive effect of the assumed exercise of stock options. Fair Value of Financial Instruments Accounts receivable, accounts payable, accrued expenses and other current assets and liabilities are carried at amounts which reasonably approximate their fair values because of the relatively short maturity of those instruments. It is not practical to estimate the fair value of the Company's Long-term Note Payable to Affiliate due to its unique nature. Recent Pronouncements In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS No. 121 but retains SFAS No. 121's fundamental provisions for recognition/measurement of impairment of long-lived assets to be held and used, and measurement of long-lived assets to be disposed of but retains the requirement to report discontinued operations separately from continuing operations and extends that reporting requirement to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and for interim periods within these fiscal years. The Company does not expect the impact of adopting SFAS No. 144 to be material. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets ("the Statements"), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. The Company does not expect the adoption of the Statements to impact the earnings or financial position of the Company. Reclassifications Certain fiscal year 2001 and 2000 amounts have been reclassified to conform to the fiscal year 2002 presentation. 3. RELATED PARTY TRANSACTIONS Note Payable to AMASYS During August 2001, AMASYS and COMTEX signed an amendment to the Note Payable to AMASYS, (Second Amendment to Amended, Consolidated and Restated 10% Senior Subordinated Secured Note) (the "Amended Note") extending the due date of the note until July 1, 2008. In addition to the extension of the term, the Amended Note includes a provision for AMASYS to convert all or a portion of the outstanding principal amount, plus accrued interest, into common stock of COMTEX. The Amended Note is convertible at a price of $1.00 per share, which price increases by $0.10 upon each anniversary of the amendment. The Amended note bears interest at a rate of 10% on the principal balance of $914,954 at June 30, 2002. Principal payments of $39,000 were made during fiscal year 2002. The Note is collateralized by a continuing interest in all receivables, all products of such receivables and the proceeds thereof, all purchase orders, and all patents and technology now or hereafter held or received by the Company. Approximately $93,000, $97,000 and $105,000 in interest was paid to AMASYS during the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Stock Option Transfer During fiscal years 2002 and 2001, the Gillulys transferred 238,500 and 242,000, respectively, of their stock options, which were fully exercisable at $0.10 per share, to certain members of management. This transfer resulted in compensation expense to the Company of approximately $7,000 and $315,000 for fiscal years 2002 and 2001, respectively. The options were exercised in February 2002. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at June 30: 2002 2001 ---------------- --------------- Computer Equipment $ 2,814,878 $ 2,656,134 Furniture and Fixtures 431,247 435,816 Software and Software Development 2,711,770 2,258,897 Leasehold Improvements 183,979 183,204 Other Equipment 14,064 14,064 ---------------- ---------------- 6,155,938 5,548,115 Less Accum. Depreciation & Amort. (2,910,912) (1,817,462) ---------------- ---------------- Net $ 3,245,026 $ 3,730,653 ================= ================
Depreciation expense for the fiscal years ended June 30, 2002, 2001 and 2000 was $573,000 $432,000 and $136,000, respectively. Amortization expense was $541,000, $342,000 and $107,000 for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. 5. CAPITAL LEASE OBLIGATIONS AND LINE OF CREDIT In May 2002, the Company entered into a $50,000, three-year capital lease agreement with Compaq Financial Services to purchase software and related maintenance. The lease calls for monthly installments of $1,755 and expires in April 2005. The leased software is capitalized using the interest rates appropriate at the inception of the lease. The related software is included in property and equipment and depreciated accordingly. Future minimum lease payments under capital lease obligations at June 30, 2002 are as follows: Fiscal Year Ending June 30, 2003 $ 21,060 2004 21,060 2005 17,550 -------------------- 59,670 Less amounts representing interest (11,871) -------------------- Present value of net minimum payments 47,799 Less current portion (14,492) -------------------- Long-term portion $ 33,307 ====================
Approximately $2,700 in interest was paid to Compaq Financial Services during the fiscal year ended June 30, 2002. In June 2001, the Company obtained a $500,000 line of credit with United Bank. The line of credit was collateralized by a security interest in all inventory, chattel paper, accounts, equipment and general intangibles. The line of credit bore interest at the Prime Rate and expired June 29, 2002. The Company did not utilize the line of credit. 6. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Fiscal Year Ended June 30, 2002 2001 2000 --------------- ------------ ------------ Numerator: Net Income/(Loss) $ (1,361,023) $ 265,453 $ 1,241,497 ================ ============ ============ Denominator: Denominator for basic earnings per share - weighted average shares 11,348,923 10,026,735 9,051,214 Effect of dilutive securities: Stock Options - 3,942,355 3,617,831 ---------------- ------------- ------------ Denominator for diluted earnings per share 11,348,923 13,969,090 12,669,045 ================ ============ ============ Basic (Loss)/ Earnings Per Share $ (.12) $ .03 $ .14 Diluted (Loss)/ Earnings Per Share $ (.12) $ .02 $ .10
7. INCOME TAXES Income taxes included in the Statements of Operations consist principally of state income taxes and local franchise taxes. The tax provision for continuing operations differs from the amounts computed using the statutory federal income tax rate as follows: 2002 2001 2000 ------ ------ ----- Provision at statutory federal 34% 34% 34% income tax rate Provision - state income tax 4 4 4 Change in valuation allowance (38) (38) (38) ------ ------ ------ Effective income tax rate 0% 0% 0% ====== ====== ======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the deferred tax assets and liabilities were as follows: As of June 30, 2002 2001 ------------- ------------ Deferred tax assets: Net operating loss carryforwards - operations $ 1,067,497 $ 608,771 Net operating loss carryforwards - NQSOs 173,138 144,484 Amortization 19,600 26,167 Allowance for bad debts 114,054 210,480 Options to executives 2,538 129,808 Accruals 339,959 59,776 Note receivable reserve 34,132 34,132 Alternative minimum tax credit carryforward 13,865 19,865 Other 456 4,887 ------------- ------------ Total deferred tax assets 1,765,239 1,238,370 Deferred tax liabilities: Depreciation (188,035) (137,070) ------------- ------------ Total deferred tax liabilities (188,035) (137,070) ------------- ------------ Deferred tax assets less liabilities 1,577,204 1,101,300 Less: Valuation allowance (1,577,204) (1,101,300) ------------- ------------ Net deferred tax asset (liability) $ - $ - ============= =============
The Company has net operating loss (NOL) and business tax credit carryforwards available to offset future taxable income of approximately $3,000,000 as of June 30, 2002. The net change in valuation allowance during 2002 was an increase of approximately $476,000. These NOL and the business tax credit carryforwards expire beginning in the year 2003. Utilization of these net operating losses may be subject to limitations in the event of significant changes in stock ownership of the Company. In assessing the realizability of its net deferred tax assets, management considers whether it is more likely than not that some portion or all of the net deferred tax assets are realizable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of June 30, 2002, the Company provided a full valuation allowance of approximately $1.6 million against its net deferred tax assets. 8. STOCK OPTION PLAN The Company's 1995 Stock Option Plan (the "1995 Plan") provides for both incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and non-qualified stock options to purchase shares by key employees, consultants and directors of the Company. The Company has 3,901,935 shares reserved for issuance under the 1995 Plan as of June 30, 2002, subject to annual increases as determined by the Board of Directors. The exercise price of an incentive stock option is required to be at least equal to 100% of the fair market value of the Company's common stock on the date of grant (110% of the fair market value in the case of options granted to employees who are 10% shareholders). The exercise price of a non-qualified stock option is required to be not less than the par value, nor greater than the fair market value, of a share of the Company's common stock on the date of the grant. The term of an incentive or non-qualified stock option may not exceed ten years (five years in the case of an incentive stock option granted to a 10% stockholder), and generally vest within three years of issuance. Information with respect to stock options under the 1995 Plan is as follows: 2002 2001 2000 ------------------------------------------------------------------------ Shares Weighted Shares Weighted Shares Weighted Avg. Avg. Avg. Exercise Exercise Exercise Price Price Price -------------- -------- ---------- --------- ----------- ----------- Outstanding at beginning of year 1,964,090 $ 1.19 1,633,805 $ 0.84 1,767,583 $ 0.25 Granted 859,500 0.49 717,125 2.45 548,500 2.17 Exercised (329,725) 0.20 ( 134,180) 0.48 ( 514,147) 0.15 Expired/ Forfeited (527,688) 1.77 (252,660) 2.90 (168,131) 1.02 -------------- =========== =========== Outstanding at End of year 1,966,177 0.89 1,964,090 1.19 1,633,805 0.84 ============== =========== =========== Options exercisable at end of year 1,023,682 0.73 1,208,700 0.52 1,119,353 0.30 Weighted average fair value of options granted $ 0.42 $ 1.98 $ 1.80
The following table summarizes information about the stock options outstanding at June 30, 2002: Outstanding Exercisable - ------------------------------------------------------------- ------------------------------- Weighted-Average Weighted- Remaining Weighted- Number of Average Contractual Life Number of Average Exercise Price Shares Exercise Price (years) Shares Exercise Price - ------------------------------------------------------------- -------------------------------- $ 0.10-0.63 1,417,237 $ 0.34 7.04 769,937 $ 0.21 $ 0.86-1.84 209,150 $ 1.66 8.11 102,685 $ 1.64 $ 2.05-4.88 339,790 $ 2.71 8.08 151,060 $ 2.70 --------- --------- 1,966,177 1,023,682 ========= =========
The Company has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for the Company's stock option plan been determined based upon the fair value at the grant date for awards under the plan consistent with the methodology prescribed under SFAS No. 123, the Company's net (loss)/income in fiscal years 2002, 2001 and 2000 would have been approximately $(1,787,000), $(45,000) and $1,052,000, or $(.16), $ .00 and $ .12 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing fair value model. The following weighted-average assumptions were used for grants: dividend yield of 0%; expected volatility of 1.10 to 1.23; expected life of the option term of 5 years and risk-free interest rate of 4.09% to 4.82%. 9. EMPLOYEE STOCK PURCHASE PLAN In December 1997, stockholders approved the 1997 Employee Stock Purchase Plan. The purpose of the Plan is to secure for the Company and its stockholders the benefits of the incentive inherent in the ownership of Common Stock by present and future employees of the Company. The Plan is intended to comply with the terms of Section 423 of the Internal Revenue Code of 1986, as amended, and Rule 16b-3 of the Securities Exchange Act of 1934. Under the terms of the Plan individual employees may pay up to $10,000 for the purchase of the Company's common shares at 85% of the determined market price. 10. SUPPLEMENTARY INFORMATION Income Statement The following income statement items were charged to costs and expenses: Fiscal Year Ended June 30, 2002 2001 2000 ---------------- -------------------- ------------------- Maintenance and Repairs $ 103,105 $ 150,878 $ 96,685 Advertising and Promotion Costs 60,076 369,522 241,437 Royalties 3,724,109 4,257,494 3,205,744
Allowance for Doubtful Accounts The following table summarizes activity in the allowance for doubtful accounts: Fiscal Year Ended June 30, -------------------------- 2002 2001 2000 ---------- ----------- ------------ Beginning Balance $ 553,896 $ 314,331 $ 350,868 Additions - charged to operating expenses 412,497 823,850 225,500 Write-Offs (666,250) (584,285) (262,037) ---------- ----------- ------------ Balance at End of Year $ 300,143 $ 553,896 $ 314,331 ========== =========== ============
11. COMMITMENTS AND CONTINGENCIES The Company leases office space under noncancelable operating leases that expire beginning December 31, 2002. The leases require fixed escalations and payment of property taxes, insurance and maintenance costs. The future minimum rental commitments under operating leases are as follows: Fiscal year ending Minimum Rental June 30, Commitments - ------------------- ------------------ 2003 $ 591,718 2004 495,583 2005 484,019 2006 498,540 2007 513,496 2008 and beyond 617,493 ------------------ $ 3,200,849 ================== Rent expense under all operating leases totaled approximately $595,000, $554,000 and $278,000 for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. On July 17, 2001, the Company filed a breach of contract action against Infospace, Inc., a former customer, in the United States District Court for the Eastern District of Virginia for payments owed under contracts with the defendant corporation. The suit is captioned COMTEX News Network, Inc. v. Infospace, Inc. Case Number CV01-1108-A. On August 13, 2001, Infospace filed an Answer and Counterclaim alleging that COMTEX breached its agreement and sought damages for lost business, loss of reputation and good will. On March 11, 2002, the court rendered a directed verdict in favor of Infospace on the breach of contract claim and Infospace withdrew the counterclaim without prejudice. Infospace also filed a petition with the court for reimbursement of attorneys' fees and costs. On April 9, 2002, COMTEX filed a Notice of Appeal to reverse the lower court decision. The case is now fully briefed before the United States Court of Appeals for the Fourth Circuit and the Company expects a ruling sometime in early 2003. While the appeal was pending, the court, on August 13, 2002, issued an order awarding attorneys' fees of approximately $393,000 to Infospace with costs still to be determined. COMTEX intends to seek a stay of this award pending a ruling on the appeal. If COMTEX prevails on the appeal, the award of attorneys' fees would likely be reversed. Infospace also has petitioned the court to require COMTEX to reimburse Infospace for approximately $201,000 in costs. This petition is still pending before the court. COMTEX has recorded an accrual in the year ended June 30, 2002 to provide for the estimated exposure upon resolution of this matter. The Company is also involved in routine legal proceedings occurring in the ordinary course of business, which in the aggregate are believed by management to be immaterial to the Comapany's financial condition. 12. 401(K) PLAN The Company has a 401(k) plan available to all full-time employees who meet a minimum service requirement. Employee contributions are voluntary and are determined on an individual basis with a maximum annual amount equal to the maximum amount allowable under federal tax regulations. All participants are fully vested in their contributions. The 401(k) plan provides for discretionary Company contributions. The Company did not make any contributions during the fiscal years ended June 30, 2002, 2001 and 2000. 13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended June 30, 2002 and 2001. Quarter Ended: --------------------------------------------------------------------- September 30, 2001 December 31, 2001 March 31, 2002 June 30, 2002 ------------------ ----------------- -------------- ------------- Revenues $ 3,464,051 $ 3,197,808 $ 2,901,678 $ 2,684,157 Gross Profit 2,385,852 2,199,018 1,900,515 1,703,920 Net Income/(Loss) 69,397 2,967 (483,670) (949,717) Net Income/(Loss) per share, basic $ 0.01 $ 0.0003 $ ( 0.04) $ (0.07) Shares used in per share calculation, basic 10,198,846 10,445,149 11,659,409 13,092,290 Net Income/(Loss) per share, diluted $ 0.01 $ 0.0002 $ (0.04) $ (0.07) Shares used in per share calculation, diluted 12,994,747 12,924,521 11,659,409 13,092,290
Quarter Ended: ------------------------------------------------------------------------- September 30, 2000 December 31, 2000 March 31, 2001 June 30, 2001 ------------------------------------------------------------------------- Revenues $ 4,161,097 $ 4,324,648 $ 4,306,391 $ 3,805,382 Gross Profit 3,000,876 3,168,716 3,134,803 2,615,178 Net Income 173,191 112,388 70,179 (90,305) Net Income per share basic $ 0.02 $ 0.01 $ 0.01 $ (0.01) Shares used in per share caluculation, basic 9,968,150 9,982,881 10,062,307 10,093,602 Net Income per share, diluted $ 0.01 $ 0.01 $ 0.01 $ (0.01) Shares used in per share calculation, diluted 13,785,500 13,814,914 14,062,685 14,213,260
EX-10.21 3 exh_1021.txt EXHIBIT 10.21 EXHIBIT 10.21 AMENDMENT NUMBER TWO (2) TO EMPLOYMENT AGREEMENT This Amendment Number Two (2) is entered into this 10th day of September 2002, ("Amended Employment Agreement") by and between COMTEX News Network, Inc. ("COMTEX"), a Delaware corporation, with its principal executive offices at 4900 Seminary Road, Alexandria, Virginia 22311 ("Company"), and CHARLES W. TERRY, whose address is 13201 Dodie Drive, Darnestown, Maryland 20878 ("Employee"). W I T N E S S E T H: WHEREAS, COMTEX and the Employee entered into an employment agreement on the 1st day of October 1998 and amended on the 1st day of October 2001 (hereinafter "Agreement"); and WHEREAS, COMTEX and the Employee wish to amend the terms of the Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein below, the parties hereto agree as follows: 1. The term of the Agreement shall be extended through December 31, 2002. 2. All conditions of the original Agreement not amended herein shall remain in full force and effect. COMTEX NEWS NETWORK, INC. ACCEPTED & AGREED TO: /S/ C.W. GILLULY /S/ CHARLES W. TERRY By: ------------------------- ----------------------- C.W. Gilluly, Ed.D. Charles W. Terry Chairman Board of Directors EX-23 4 exh_23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated August 29, 2002 with respect to the financial statements of Comtex News Network, Inc. included in the Annual Report on Form 10-K for the year ended June 30, 2002, in the following Registration Statements: 1. Registration Statement Number 333-42395 (Comtex News Network, Inc. 1997 Employee Stock Purchase Plan) on Form S-8 2. Registration Statement Number 333-37057 (Comtex News Network, Inc. 1995 Stock Option Plan) on Form S-8 3. Registration Statement Number 333-96265 (Comtex News Network, Inc. 1995 Stock Option Plan) on Form S-8 4. Registration Statement Number 333-62716 (Comtex News Network, Inc. 1995 Stock Option Plan) on Form S-8 /s/ Ernst & Young LLP McLean, Virginia September __, 2002 -----END PRIVACY-ENHANCED MESSAGE-----